Basics of Supply Chain Management

Session 10
Theory of Constraints

APICS Certified in Production and Inventory Management (CPIM)

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Basics of Supply Chain Management
1. 2. 3. 4. 5.
Capacity
Introduction to Material Management
Demand Master
Supply Chain Requirements and
Management Planning Production
Management Planning
Activity Control

Aggregate Purchasing Lean and Theory of

Item Inventory
Inventory and Physical Quality Constraints
Management
Management Distribution Systems

6. 7. 8. 9. 10.

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Learning Objectives
 Introduction to Theory of Constraints
− Explain the importance of managing the constraint to maximize system
throughput.
 General Applications
− Describe the four basic types of logical product flows in the materials
transformation process (VATI).
− Explain the difference between a bottleneck and a capacity-constrained
resource, and between an internal and external constraint.
− Explain the purpose of the drum, buffer, and rope in planning and
scheduling.
− Differentiate between the three types of buffers and their use.
− Explain the role of buffer management in controlling the process.
− List the criteria for the strategic placement of stock buffers.
− Explain the five focusing steps.
− Describe the relationship between theory of constraints (TOC) and the
critical chain.
− Describe how a pull system works with the TOC philosophy.

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 Session 10
Theory of Constraints

Introduction to Theory of
Constraints

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Philosophy and Basic Principles
Constrains determines system performance

 It’s a Holistic philosophy

 Throughput-based thinking
 Focusing on the constraint

Departs from conventional thinking

 Focusing on the weakest link

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Types of Constraints

 Throughput-based
− Internal: physical resource constraint “Machine, Skills,
Suppliers”
− External: market constraint
 Behavior-based (People Based)
− Lack of understanding of causes and effects of
problems
− Not knowing where to start making improvements

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Problem-Solving Tools

1. Five focusing steps used to address throughput

based constrain
2. Thinking process—six logic trees “Beyond our
scope” answer the following questions:
− What should be changed?
− What should it be changed to?
− How should a change be created?

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 Session 10
Theory of Constraints

General Applications

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VATI Analysis
Diagrams of logical flow of material form raw to finished product stage
The First step in determining how to apply TOC Logic

Logical product diagrams

= Finished products
or = Process
= Raw Material

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Problem 10.1
Match these products to the flow that fits their
production:

a. Jet engine

b. Steel products

c. Packaged food products

d. Personal computers

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Problem 10.1 Solution
Match these products to the flow that fits their
production:

a. Jet engine

b. Steel products

c. Packaged food products

d. Personal computers

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Five Focusing Steps
Drum-Buffer-Rope Planning
Step 1 Identify the constraint.

Capacity shown assumes a 24-hours-per-day, 7-days-per-week operations schedule.

A B C D E
150/hr 140/hr
110/hr 80/hr 140/hrr
140/h 210/hr
Raw
material Ship

If the market demand = 500 per hour, C = the active bottleneck.

If the market demand = 75 per hour, C = capacity-constrained resource.
If the market demand = 50 per hour, the market is the constraint.
Going forward demand is 75
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Problem 10.2

A B C D E
150/hr
300/hr 140/hr
280/hr 280/hr
80/hr 160/hr
140/h 210/hr
420/hr
Raw
material Ship

a. If the market demand = 600 per hour, what is the active

bottleneck?
b. If the market demand = 80 per hour, what is the constraint?
c. If the market demand = 150 per hour, what is the role of resource
D?

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Problem 10.2 Solution

A B C D E
150/hr
300/hr 140/hr
280/hr 280/hr
80/hr 160/hr
140/h 210/hr
420/hr
Raw
material Ship

a. If the market demand = 600 per hour, D is the active

bottleneck.
b. If the market demand = 80 per hour, the market is the
constraint.
c. If the market demand = 150 per hour, resource D is the
CCR.

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Drum-Buffer-Rope Planning
Step 2 Exploit the constraint “using const. to its max
capability”.
Market demand = 75 per hour

A B C D E
150/hr 140/hr
110/hr 80/hr 140/hr
140/hr 210/hr
Raw
material Ship

 Exploit = use the constraint to the maximum:

− Ensure quality of material.

− Stagger work breaks.

− Perform preventive maintenance.
− Create a realistic finite schedule at resource C (the drum).
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Drum-Buffer-Rope Planning
Step 3 Subordinate everything to the constraints “to
support step 2”.
Market demand = 75 per hour
Drum Protective
capacity

A B C D E
150/hr
150/hr 110/hr
140/hr 80/hr 140/hrr
140/h 210/hr
210/hr
Raw
material Ship
Ship

Constraint buffer Shipping buffer

(five-hour lead time) (three-hour lead time)

Stock buffer Stock buffer Stock buffer

Rope : Demand Signal communicate material release schedule

don’t release before basis , controls lead time and time
buffer between material release and resource C
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Problem 10.3

G
A B
H C
I D
J K
E
150/hr
10 140/hr
5 80/hr
9 140/h
8 210/hr
7
Raw
material Ship
Capacity = units/day

Where is the drum?

Where should stock buffers be located?

Where is the rope?

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Problem 10.3 Solution

G
A B
H C
I D
J K
E
150/hr
10 140/hr
5 80/hr
9 140/h
8 210/hr
7
Raw
material Ship
Capacity = units/day

The drum is at H.

The stock buffers should be located before raw

material, H, and shipping.
The rope goes from H to raw material.

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Buffer Management
Back to step 3 and part of it
Job of a buffer coordinator

Monitoring the buffers

Red zone Red zone: Expedite.
Yellow zone Yellow zone: Monitor.
Green zone Green zone: Don’t worry.

Red zone Red zone

Green zone Yellow zone Green zone Yellow zone

A B C D E
150/hr
150/hr 110/hr
140/hr 80/hr
80/hr 140/hrr
140/h 210/hr
210/hr
Raw
material Ship
Ship

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Drum-Buffer-Rope Planning
Step 4 Elevate the constraint.

Market demand = 75 per hour

A B C D E
150/hr
150/hr 110/hr
140/hr 80/hr
80/hr 140/hrr
140/h 210/hr
210/hr
Raw
material Ship

 If Steps 2 and 3 are not sufficient or market conditions

change,
− add new equipment “needs a principle called Throughput
accounting”
− reorganize
− make other productivity improvements.
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Drum-Buffer-Rope Planning System
Step 5 Find new constraint and repeat cycle.

 Five focusing steps

Identify the
− A process to constraint.
continuously improve
organizational profit by
evaluating the production Exploit the
Start over.
system and market mix constraint.
to determine how to
make the most profit
using the system
constraint

Elevate the Subordinate

constraint. everything else.

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Simplified Drum-Buffer-Rope
When constrain is no longer internal , The market is the
constraint.
Market demand = 20 per hour

A B C D E
150/hr
150/hr 110/hr
140/hr 80/hr
80/hr 140/hrr
140/h 210/hr
210/hr
Raw
material Ship

Shipping buffer
(eight-hour lead time)

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Throughput Accounting

 A management accounting system for evaluating steps to

elevate the constraint in TOC planning
− (T) Throughput ($)
• Throughput $ = sales revenue – true variable costs (TVC)
− (I) Investment (inventory, equipment, and so on)
− (OE) Operating expense
 Operational decisions are evaluated in the following order:
Priority 1 Priority 2 Priority 3

Impact on T Impact on I Impact on OE

TVC = cost of raw materials and sales commissions

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Critical Chain ,
a project management teq. That utilizes the TOC

 TOC principles have influenced the use of the

critical chain method in project management in the
following ways:
− Individual tasks are not as important as the goals of
the system.
− It is important to manage constrained resources.
− It is important to protect (minimize) manufacturing
lead time by strategic buffering to prevent delays.

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Distribution
TOC in distribution takes advantage of Keeping stock centralized

 Hold inventory near the factory.

 Use a pull system to replenish distributors from
factory.
 Use a periodic review system to reorder.
 Monitor inventory against target levels as in buffer
management (zones).
 Place orders frequently and in small quantities.
 Combine orders for economies of full-truckload
deliveries.

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Learning Objectives
 Introduction to Theory of Constraints
− Explain the importance of managing the constraint to maximize system
throughput.
 General Applications
− Describe the four basic types of logical product flows in the materials
transformation process (VATI).
− Explain the difference between a bottleneck and a capacity-constrained
resource, and between an internal and external constraint.
− Explain the purpose of the drum, buffer, and rope in planning and
scheduling.
− Differentiate between the three types of buffers and their use.
− Explain the role of buffer management in controlling the process.
− List the criteria for the strategic placement of stock buffers.
− Explain the five focusing steps.
− Describe the relationship between theory of constraints (TOC) and the
critical chain.
− Describe how a pull system works with the TOC philosophy.

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 Session 10
Theory of Constraints

Wrap-Up and
Homework

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Vocabulary Check Performance Check
1. (Across)Critical Chain Method 1. B
1. (Down) Constraint 2. C
2. Distribution system 3. D
3. Excess capacity 4. B
5. D
4. Drum buffer rope
5. Bottleneck
6. Theory of Constraints
7. 5 Focusing steps
8. Protective capacity
9. TOC performance measure
10. Throughput accounting
11. Buffer management

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Vocabulary Check
1 2
C R I T I C A L C H A I N M E T H O D
O I
3
N E X C E S S C A P A C I T Y
4
S 5 6
D T
T B T H E O R Y O F C O N S T R A I N T S
R O U I
A T M 7
B
I T B F I V E F O C U S I N G S T E P S
N L U T
8
T E F P R O T E C T I V E C A P A C I T Y
N F O
E E N
9
T O C P E R F O R M A N C E M E A S U R E S
K R Y
O S
10
T H R O U G H P U T A C C O U N T I N G
E 11
E
B U F F E R M A N A G E M E N T

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