Theory of Constraints

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Presented By:-
Chirag Chauhan #303
Ishan Parekh #315
Ankit Shah #317

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Theory of Constraints
 Theory of Constraints is a method to identify
bottlenecks or other constraints and exploit them to
the extent possible.
 Identification of constraints allows management to take
action to alleviate the constraint in the future
 Reduce cycle time
 Time from receipt of customer order to shipment
 Improve manufacturing cycle efficiency (MCE)
 Processing time / total cycle time

3.  Goldratt contends that systems are analogous to chains, or
networks of chains. Like a chain, the system performance is
limited by the weakest link.
 This means that no matter how much effort you put into
improving the processes of a system, only the improvements
to the weakest link will produce any detectable system
improvement.
 Throughput is limited by the weakest link... the constraint!
Theory of Constraints

5. Identification and
Management of Bottlenecks
 A Bottleneck is the process or step which has
the lowest capacity and longest throughput.
 Throughput Time is the total time from the
start to the finish of a process.
 Bottlenecks can be internal or external to a
firm.

6. Significance of bottlenecks
 Maximum speed of the process is the speed of the
slowest operation
 Any improvements will be wasted unless the bottleneck
is relieved
 Bottlenecks must be identified and improved if the process is
to be improved
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7. Where is the Bottleneck?
It takes 10 + 20 + max (15, 12) + 5 + 10 = 60 minutes to complete a loan application.
Unless more resources are added at step B, the bank will be able to complete only 3 loan
accounts per hour, or 15 new load accounts in a five-hour day.
1. Check loan
documents and
put them in
order
(10 minutes)
2.
Categorize
loans
(20
minutes)
3. Check for
credit rating
(15 minutes)
6. Complete
paperwork for
new loan
(10 minutes)
4. Enter loan
application data
into the system
(12 minutes)
Customer
5. Is
loan
approved?
(5 min)
Yes
No
Bottleneck

8. Measurement for TOC
 Throughput
 Inventory
 Operating expense

9. What is Throughput
 The rate at which the system generates money through
sales minus raw materials and purchased parts.
All the money received from customers minus raw
materials cost.
The rate at which the system makes money(sales
minus totally variable costs). Direct labor should not
be deducted in calculating Throughput.
Sales are only recognized when money is available to
the firm, i.e., production for inventory is not a part of
throughput.

10. What is Inventory
 All the money that system has invested in purchasing
things which it intends to sell
Some insights
 Inventory is liability not an asset
 Raw materials and finished good are inventory
 Machines and fixtures are inventory
 Scrap material is inventory

11. What is Operating Cost
 All the money the system spends in order to turn
inventory into throughput
All employee time is operating expense
Depreciation of a machine is a operating expense.
Scrap material thrown away.
All expenses not deducted in arriving at throughput.
This includes direct labor and all operating and
maintenance expenses

12. Drum
Buffer
Rope
Five
Focusing
Steps
Critical
Chain
Thinking
Processes
Theory of Constraints Covers Many Things

13. Five Focusing Steps

14. 1. Identify the Constraint
2. Exploit the Constraint
3. Subordinate everything
to the Constraint
4. Elevate the Constraint
5. Repeat for the new
Constraint
Theory of Constraints - FIVE FOCUSING STEPS
(Which will Strengthen the Chain)

15. Step 1: Identify the system’s constraint(s).
 What is the Goal?
 What is Throughput?
 What is Inventory?
 What is Operating Expense?
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1. Identify the System's constraints.
The process is analyzed so that a task or activity that limits the productivity of
an entire system can be identified. A system constraint may be identified by a
long queue of work or long processing times.

16. Step 2: Decide how to exploit the system’s constraint(s).
 What is the constraint?
 How do we get as much throughput as possible?
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2. Decide how to exploit the system's constraints.
In this step, decisions must be made on how to modify or redesign the task or
activity so that work can be performed more effectively and efficiently.

17. Step 3: Subordinate everything else to the decisions of Step 2
 Throughput?
 Inventory?
 Operating Expense?
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3. Subordinate everything else to the above decision. (step 2)
Now, management directs all its efforts to improving the performance of the
constraining task or activity and any other task or activity and any other task or
activity that directly affects the constraining task or activity.

18. Step 4: Elevate the system’s constraint(s).
 Throughput?
 Inventory?
 Operating Expense?
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4. Elevate the system's constraint.
In this step, additional capacity is obtained that will increase (elevate) the overall
output of the constraining task or activity. This differs from step 2 in that the added
output comes from additional purchased capacity, such as buying a second machine
tool or implementing a new information technology.

19. Step 5: If a constraint is broken in Step 4, go back to Step 1.
 What might happen if the constraint is elevated?
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5. If, in the previous step, a constraint has been broken, go back to step 1 but do not
allow inertia to cause a new constraint
This sets up a process of ongoing improvement. As a result of the focusing process,
the improvement of the original constraining task or activity may cause a different
task to become a constraining task or activity. Inertia could blind management
from taking steps to improve the system's output now limited by a new
constraint.(1)

20. THE THINKING PROCESSES (TP) OF TOC
 Tools that enable us to use logic to gain an
understanding of our reality and then to find ways of
improving it.
 BASIC CONSTRUCTS OF THE TOC TP:-
 Causality: “If…then…”
 Necessity: “In order to…I must…”

21. EXAMPLE OF CAUSALITY
 “IF…THEN…”
I get
burned.
I touch a
hot stove.
I don't get
burned
I touch a
hot stove
I am
wearing an
oven mitt.

22. EXAMPLE OF NECESSITY
 “In order to…I must…”
Avoid getting
burned.
Do not touch a
hot stove.
Touching a hot stove will
burn me.

23. CASE STUDY

24. Applying TOC at the Marine Corps Maintenance Center

25. The Marine Corps –
Maintenance Center
Intro:
 Responsible for the regeneration & reconstitution of
equipment
 Complex maintenance operations
 Repairs & overhauls of obsolete equipments
Needs:
 Increasing backlog
 Production not able to meet demands

26. Identifying Constraints

27. Managing Production

28. Results

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Conclusion
 Advantages
 Improves capacity decisions in the short-run
 Avoids build up of inventory
 Aids in process understanding
 Avoids local optimization
 Improves communication between departments
 Disadvantages
 Negative impact on non-constrained areas
 Diverts attention from other areas that may be the next constraint
 Temptation to reduce capacity
 Ignores long-run considerations
 Introduction of new products
 Continuous improvement in non-constrained areas
 May lead organization away from strategy
 Not a substitute for other accounting methods

30. THANK YOU