improving the weakest link: a toc-based framework for small businesses

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Improving the weakest link: A TOC-based framework for small businessesMahesh Gupta a , Hardeep Chahal b , Gurjeet Kaur b & RamjiSharma ba University of Louisville , Louisville, KY, USAb University of Jammu , Jammu, J&K, IndiaPublished online: 12 Jul 2010.

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Improving the weakest link: A TOC-based framework for smallbusinesses

Mahesh Guptaa∗, Hardeep Chahalb, Gurjeet Kaurb and Ramji Sharmab

aUniversity of Louisville, Louisville, KY, USA; bUniversity of Jammu, Jammu, J&K, India

Small businesses constantly face challenges as they respond to changing environmentalfactors such as the emergence of worldwide markets, marketing clouts, depth and rangeof better quality products and demand for faster delivery times. In order to survive andprosper, small businesses have to redesign themselves for successful and sustainedinnovations. The implementation of evolving management philosophies such astheory of constraints, can provide an effective opportunity for them to compete andlead. The purpose of this paper is to accentuate the distinctive features of theory ofconstraints framework consisting of 3Ms (mindset, measurements and methodology)in a simple way that will assist the small-business owners/managers in theimplementation. The proposed framework suggests that the managers should have:(i) a mindset of ‘making’ money instead of ‘saving’ money; (ii) focus on ‘increasingthroughput’ instead of ‘reducing expenses’, through recognition and attention; and(iii) implicit ‘focused’ continuous improvement method to manage businessconstraints instead of improving processes ‘at random’. Using a simple case studyprimarily and citing real-life small-business examples (where possible), wedemonstrate how the theory of constraints based framework helps small businessmanagers improve profitability by making significantly better decisions in strategicareas like product mix, pricing, new product introduction, outsourcing/purchasing,and investment decisions. We conclude our paper by acknowledging a fewshortcomings of our paper and discussing some future research directions.

Keywords: theory of constraints; throughput world-thinking; throughput; inventory;operating expenses; five focusing steps

Introduction

The Small Business Act of 1953 defines small business as, ‘one which is independently

owned and operated, and not dominant in its varied fields of operations’. More explicitly,

it is an organisation that: (i) is actively managed by the owner(s); (ii) is highly personal-

ised; (iii) operates in mainly local areas; and (iv) is largely dependent on internal sources

of capital to finance its growth (Baumback, 1988). In general parlance, small businesses

are regarded as fountainheads of entrepreneurship, innovation and nimble-footed

change agents (Shukla, 2004) and are recognised more for their cohesive culture and

simpler structures due to limited product lines and customers (Pelham & Wilson, 1996;

Wu, 2001), which reduces the need for formal activities designed to gather and process

information for decision making.

The small business sector has emerged as a most vital and dynamic sector of the

national economies the world over (Dalu & Deshmukh, 2001). The functional vibrancy

of these businesses rest on forte attributes such as flexibility, that is the ability to make

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DOI: 10.1080/14783363.2010.483108

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∗Corresponding author. Email: [email protected]

Total Quality Management

Vol. 21, No. 8, August 2010, 863–883

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quick adjustments to changing economic and trading scenario (Harrison, 1994; McAdam

& McKeown, 1999; Wu, 2001); owner management which ensures quicker decision-

making (Arun, 1999; Selvam, 1996); inexpensive labour and low overheads, that is no

expensive investment in land and building and less capital-intensive production processes

(Selvam, 1996; Wu, 2001).

Despite all these developments, small businesses are characterised by a myopic view

of management (Ahire, 1996). Lack of planning (Robinson & Pearce, 1984), systematic

decision making and strategic thinking (Robinson, 1982; Sexton & Van Auken, 1982),

long-term orientation (Gilmore, 1971), resources, intense competition from large

companies (Megginson et al., 1994) and presence of small competitors and more focus

on survival challenges (Ahire, 1996) makes them vulnerable to the global competitive

environment. More significantly, lack of quality consciousness (Selvam, 1996), underuti-

lisation of capacity (Sandesara, 1993; Swamy, 1995), lack of trained workers (Dalu &

Deshmukh, 2001), management deficiency (Shah, 1997) and lack of financial strength

(Narain, 1997) are found to be critical factors that affect the growth of small businesses.

Thus, it is imperative for small businesses to configure and manage their operations to

support their business strategies and establish themselves as notable winners (Hayes &

Upton, 1998).

In such circumstances, application of theory of constraints (TOC) approach in small

firms will open a path for them to assume greater risk and tolerance to eliminate the

basic tribulations pertaining to, for example, under utilisation of capacity, quality con-

sciousness, management deficiency using their forte points. TOC will provide small

businesses with a firm-wide focus for objectives, decisions and actions. It will contribute

to making more money/profit, innovation and new product development.

In this paper, our objective is to demonstrate how TOC can assist the small business

manager in solving varied problems to create and sustain competitive advantage. More

specifically, we provide a simple TOC-based framework consisting of 3Ms (mindset,

measurements and methodology) to implement TOC concepts and principles in a small

business. Using a comprehensive small business case study and citing real-life small-

business examples, we will demonstrate how identification and management of the con-

straints produce significantly better decisions in strategic areas such as product mix,

pricing, new product introduction, outsourcing/purchasing, and investment. In the rest

of this section, we briefly review the literature describing benefits of implementing

TOC concepts by focusing primarily on small business success stories. We rationalise

the use of TOC approach to manage small businesses and review the facts of a relatively

comprehensive small business case study. In the next section, we briefly discuss the 3Ms of

TOC. We then provide a comprehensive discussion of the TOC-based framework by using

case studies as examples to make the point.

Applications of TOC – a small business perspective

Both trade and academic journals have reported cases in which companies have achieved

operational excellence by means of focused process improvement and effective manage-

ment and scheduling of constrained resources. A number of TOC implementations have

been reported (Cox & Spencer, 1998; Kendall, 1998; Noreen et al., 1996) and analysed

(Mabin & Balderstone, 2000) in the published books to suggest significant improvements.

For example, Mabin and Balderstone (2000) concluded from their survey of over 100 pub-

lished case studies in various industries such as automotive, semiconductor, furniture and

apparel that, on average, TOC implementations reduced inventories by 49%, improved

864 M. Gupta et al.

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production times measured in terms of lead times, cycle times or due date performance by

over 60%, and increased financial performance by 60%. TOC improved performance at

many companies, including Ford Motor Company, Rockland Manufacturing, Lucent

technologies, US Air Force Healthcare System and Security Federal Bank.

The concepts and principles of TOC have been applied in many small manufacturing

as well as service environments (Bushong & Talbott, 1999; Draman & Salhus, 1998;

Olson, 1998). Olson (1998) provides a TOC application in service firm that installs

burglar alarms (The ASA Company). Keeping in mind the goal and applying TOC

measures, the author discusses how exploiting a system’s constraint via reducing the

batch size helps in increasing the performance of a business.

Bushong and Talbott (1999) discuss an entrepreneurial small business producing five

varieties of high quality fish flies manually (The DE Company). They demonstrate that the

company should promote products by taking into consideration the constraint, that is, the

business owners’ time by employing concepts of the throughput per constraint minute

concept.

Draman and Salhus (1998) describe a TOC application in a production process of a

paint plant (The PM Company), primarily focusing on how to exploit the system constraint

by employing TOC-based production planning and scheduling concepts.

A brief review of these published small business success stories reveals that these

articles do not provide a comprehensive and integrated treatment to the TOC concepts

and principles. Thus, there is still a need for a case study to fill in the gaps.

By using a case study, well-known in the TOC literature, and the real-world companies

as examples, we show that small business ventures have certain advantages over large ones

in implementing the proposed TOC-based framework. The framework provides small

firms, renowned for their ad hoc and short-term decision making patterns, with a much

desired system-wide focus for objectives, decisions and actions, thereby influencing crea-

tivity and innovation. It will prove to be a significant determinant of success for small

businesses as most of them lack financial resources to seek other sources of business

success, such as low cost producer status, research and development, competitive edge,

and staff to provide adequate planning. Their small size paves the way for greater team-

work and inter-departmental cooperation, which makes TOC a suitable management phil-

osophy for them. Even though start-ups have to use absorption accounting for external

reporting, they can still use TOC for internal purposes to understand their business

better, to improve business performance, and to set themselves on a path of continuous

improvement.

Case study – ADF Company

We use a well-known job-shop manufacturing company (we will call it the ADF

Company) as an example to discuss the proposed TOC-based framework for small

businesses (Bushong & Talbott, 1999; Cox & Spencer, 1998; Draman & Salhus, 1998;

Goldratt, 1996; Kendall, 1998; Noreen et al., 1996; Olson, 1998; Mabin & Balderstone,

2000). The characteristics of a job shop include multiple products and a different route

for each product or service (see Figure 1). The flow of operation is intermittent (from

one work centre to another). Each product requires different raw materials, has different

operations, and takes different amounts of time in each operation. Examples of job shop

are machine shops, hospitals, automobile repair shops and so forth.

The product process structure of the ADF Company is depicted in Figure 2 (Goldratt,

1996). This company produces three finished goods – FGA, FGD and FGF; uses four

Total Quality Management 865

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types of raw materials – RMA, RMC, RME and RMF; and consists of five work-centres –

WCB, WCC, WCG, WCM and WCW. Per unit selling prices of products FGA, FGD and

FGF are $180, $240 and $180, respectively. Per unit cost of raw materials RMA, RMC,

RME and RMF are $30, $35, $30 and $65 respectively. Each work-centre has at least

one machine – WCB (one machine), WCC (two machines), WCG (two machines),

WCM (two machines) and WCW (one machine). Operating time on each machine is

2400 minutes (that is, 60 minutes ∗ 8 hours ∗ 5 days) per week. Thus, WCG and WCM

work centres have 4800 minutes available per week. Figure 2 also shows product

Figure 1. The ADF job shop manufacturing company.

Figure 2. Product process structure diagram of the ADF Company.Note: Bold lines depict the flow of new product FGE.

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routing and processing times. For example, product FGA requires one unit each of raw

materials RMA and RMC. Machine WCG spends 4 minutes per unit on RMA to

perform operation A27 (labelled as Column A and Row 27 in Figure 2) and 5 minutes

per unit on RMC to perform operation C27. Then both raw materials go to machine

WCW to create a sub-assembly requiring 8 minutes per unit of processing time to

perform operation B21. Subsequently, a sub-assembled unit visits machines WCG,

WCC, WCM and WCC for processing and spends 15, 15, 20 and 18 minutes per unit

respectively to perform a set of other operations. We assume that weekly operating

expenses incurred are $11,000, which includes period expenses such as salaries, utility

expenses, rent, depreciation but not the raw materials purchased on a per unit basis

from suppliers. Figure 2 also provides information pertaining to a new product FGE,

which will be discussed later in the paper.

In a real-world job shop manufacturing company, a number of factors pose great

challenges for managing a job shop. For example, (i) a great deal of material handling

is required when the processed raw-material is moved from machine to machine;

(ii) frequent set ups are performed when machines switch to produce different parts;

(iii) long queues are formed when parts wait before the machines for processing; and

(iv) lead time to serve the market is increased because of uncertainties due to machine

reliability, market demand, and raw materials’ quality. Many of these factors are often

cited as reasons for a company not making money.

In this paper, we assume that the ADF Company is a ‘paradise (perfect) company’

(Goldratt, 1996) that is, it is immune from such factors. We then demonstrate how

small-business managers have difficulty managing even such a perfect company and

thereby highlight the usefulness of the proposed framework.

The TOC-based framework: Application to the ADF Company

TOC is a management philosophy developed by Eliyahu M. Goldratt beginning in the

early 1980s in a series of fictional and non-fictional books, articles and novels (The

Goal, The Race, It’s Not Luck, Necessary But Not Sufficient). The most notable fiction

was The Goal. TOC seeks to help managers at all levels of an organisation maintain a

proper focus on system constraints. TOC recognises that system constraints limit the

performance of a system and consequently proposes a set of principles and concepts to

manage the constraints.

Although many companies have successfully employed concepts and principles

explained in these novels, a need for identifying the underlying theory of TOC has been

recognised (Boyd & Gupta, 2004). TOC-based management philosophy focuses on

change at three levels (3Ms): the mindset of the organisation, the measures that drive

the organisation, and the methods employed within the organisation (Srikanth & Robert-

son, 1998), and hence serve as three dimensions of TOC (Boyd & Gupta, 2004) – building

blocks of the proposed framework.

Mindset

The TOC concept of throughput world thinking (TWT) states that the overarching goal of

the company is ‘to make more money now as well as in the future’. Such organisational

mindset further stipulates that there are few certain necessary conditions which should

not be violated by managers. Two such important conditions generally discussed in

TOC literature are: (a) providing a satisfying work environment to employees; (b)


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providing satisfaction to the market now as well as in the future (Dettmer, 1997; Goldratt,

1994). Thus, TOC management philosophy suggests that a small business should not let

the quality of a product (customer satisfaction) and working environment (employee’s

security) become constraints towards achieving more profit.

Here, the ADF Company being a perfect company, such problems like absenteeism,

poor product quality, and poor supplier relationships do not exist and customers, as

well as employees, are satisfied. The TWT mindset further suggests that these two con-

ditions alone will not suffice unless appropriate measures and methodology to manage

constraints are not employed successfully. Yet inefficiently managed constraints of the

ADF Company, on the flip side, would mean that it will not be able to maximise its

profit opportunities, which subsequently result in employees and/or customer dissatisfac-

tion in the long-term. However, across the company, everyone attempts to answer one

question: what is the most important productive action (or decision) for the company?

Every employee (or department or process) evaluates the value of his/her local action

(or decision) based on its impact on the constraint as measured in terms of TOC measures.

Measurements

Assuming that a firm’s goal is to make more money without violating the necessary

conditions, TOC proposes a performance measurement system consisting of three

simple measures: throughput, inventory, and operating expenses (TIOE).

Throughput (T) is ‘the rate at which the system generates money through sales’. It is

the money coming into the business based on units of product actually sold. More

specifically, it is selling price minus truly variable costs (that is, the costs incurred in

direct proportion to the units sold, for example direct material costs). In our ADF

Company in Figure 2, if marketing function sold one unit of product FGA, throughput

of $115, therefore $180–($30+$35) will be realised. Table 1 shows Throughput per

unit for all the products, as well as potential net profit.

Inventory (I) is ‘all the money invested in purchasing the things the system intends to

sell’. It encompasses all properties, plants, and equipment used in operations including raw

materials, work-in-progress and finished good inventories. TOC excludes the value added

by labour and overheads incurred by processing the work-in-progress and finished goods

because labour and overheads are essentially the operating expenses and should be treated

as such. This exclusion discourages managers from building inventory for the sake of

making the balance sheet look good. In simple terms, an inventory represents the

Table 1. Potential net profit (40FGA-80FGD-40FGF).

Products FGA FGD FGF Total

Market 40 80 40Selling price per unit $180.0 $240.0 $180.0Variable

Direct material #1 ($ per unit) $30.0 $30.0Direct material $35.0 $35.0Direct material $30.0Direct material $65.0

Throughput per unit ($) $115.0 $145.0 $115.0Total throughput ($) $4,600.0 $11,600.0 $4,600.0 $20,800.0Operating $11,000.0Net profit before $9,800.0

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money caught inside the system and is very similar to what is typically termed an

investment. As an example, we assume that inventory in the TOC sense (that is, invest-

ment) is worth $500,000 in our ADF Company.

Operating Expenses (OE) are ‘all the money the system spends in turning throughput

into inventory’. It includes sales and administrative expenses, utilities, depreciation, rent,

supplies, salaries and wages, inventory carrying costs, and other overheads. In simple

terms, OE represents period expenses – all the money going out of the system regardless

of the number of products sold. In ADF Company, it is assumed that total operating

expenses are $11,000.

These operational measures (TIOE) are: (i) financial in nature; (ii) easy to apply to any

level of a company; and (iii) useful to align local decisions with the profit goal of the

company. More importantly, managers can use these measures to manage the company’s

operations without replacing the traditional financial measurements, such as Net Profit ¼

T – OE and Return-on-Investment ¼ NP/I which are needed for external purposes like

presenting financial statements and filing taxes. From the TOC perspective, throughput

is the most important measure and should be the prime focus of management decision-

making process. Table 1 shows the net profit of $9,800 after subtracting operating

expenses from total throughput assuming that the ADF Company can fulfill the market

demand for 40–80–40 units of FGA-FGD-FGF products.

Methodology

The TOC based decision-making process consists of Five Focusing Steps (FFS):

1. IDENTIFY the system constraint(s).

2. Decide how to EXPLOIT the system’s constraint(s).

3. SUBORDINATE everything else to the above decision.

4. ELEVATE the system’s constraint(s).

5. GO BACK to step 1, but DON’T allow INERTIA to cause a system constraint

Inherent in these steps are the concepts of V–A–T process structure analysis, drum-

buffer-rope scheduling system and buffer management system (see Appendix for a brief

definition). These concepts are used to describe/analyse the processes, develop the con-

straint’s optimal schedule, and manage buffer inventories on the shop floor respectively

following the TOC principles. Next, we discuss a methodology based on these focusing

steps along with TWT mindset and operational measures, which forms the backbone of

the TOC-based framework.

TOC-based framework: Discussion and analysis

In order to accentuate the peculiar nature of the TOC-based decision-making process, we

pose a question: How much Net Profit per week can ADF Company make? How can this

company start a process of ongoing improvement? How can it become more innovative

and creative? The plant manager/owner should implement a process of ongoing improve-

ment consisting of Five Focusing Steps (FFS).

Focusing step one: IDENTIFY the system constraint(s)

A constraint can be any factor, aspect or process, which restricts the performance of a

company from the customer, competitive or profit viewpoint (Umble & Srikanth, 1997).


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TOC states that all companies possess constraints, and that the number of constraints

varies from one to a few depending upon the factors affecting the business’s growth.

These constraints can be physical, such as a machine centre or scarcity of raw material,

or managerial, such as a policy or procedure or market demand (Goldratt, 1996; Gupta,

2003).

Managerial implications – the ADF company

In the ADF Company, first, we recognise that weekly demand for products FGA, FGD and

FGF is limited to 40, 80 and 40 units, respectively. Under this assumption, Table 1 shows

that the company can realise potential throughput of $20,800 and net profit of $9,800 per

week ($20,800–11,000) if it can produce all units of FGA, FGD, and FGF. Thus, market

demand for the products appears to be the constraint. However, the capacity analysis per-

formed in Table 2 shows that work centre WCB does not have enough capacity to meet the

current market demand. Thus, the plant manager can identify two possible constraints:

market demand, which limits throughput, and work centre WCB, which limits capacity.

The plant manager must first and foremost IDENTIFY the most binding constraint of

the ADF Company limiting the company’s ability to accomplish the goal. Since the ADF

Company is assumed to be a perfect plant (discussed earlier), we do not expect the exist-

ence of non-physical constraints like absenteeism, poor product quality, and poor supplier

relationships but rather a physical constraint. From Table 2, it is clear that work centre

WCB is our system’s binding constraint. The Table 2 clearly shows that our company

will not be able to fulfill even the current market demand of 40–80–40 units of FGA/

FGD/FGF respectively and, therefore, is not able to realise the maximum net profit of

$9,800 on a weekly basis. In a real company, physical constraints are relatively easy to

identify by the piles of inventory that waits processing by a constrained machine, and

by the continuous expediting pushed on this machine.

Managerial implications – the success stories

The analysis of the American Security and Alarm (ASA) Company revealed that installa-

tion of a typical residential alarm system would take a total of 2.3 days for a technician.

The ASA Company can complete approximately 26 installations per month with three

technicians working independently. However, the marketing department was selling 32

installations per month and, as a result, the technicians were well behind schedule.

Daily overtime, weekend work and constant expediting were increasing the expenses

and, above all, causing customer dissatisfaction. The author concluded that the technician

Table 2. Capacity analysis (40FGA-80FGD-40FGF).

Activities/workCentres/departments 40FGA 80FGD 40FGF

Required totaltime

Available totaltime Utilisation

Work centre WCB(minutes)

0 2720 560 3280 2400 136.7%

Work centre WCG 960 720 600 2280 4800 47.5%Work centre WCC 1320 1200 880 3400 4800 70.8%Work centre WCM 800 1440 1080 3320 4800 69.2%Work centre WCW 320 1360 0 1680 2400 70.0%

Note: Work centre WCB is identified as the constraint (3280 minutes required .2400 minutes available).

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is the bottleneck. ‘When he is working alone, he is limited by the time required for each

process separately. As a result, it is impossible for him to complete the installation any

faster. Thus, the marketing department cannot meet the demand using this method of

installation’ (Olson, 1998, p. 57).

The analysis of the Daufel Enterprises (DE) Company suggested that there was a con-

stant demand for all five different types of high quality fishing flies. The company sold out

all the products they could produce every week. The secret of this entrepreneurial busi-

ness’s success was the personal expertise of the owners in tying flies and, thereby, produ-

cing high quality fly-fishing. Due to the fact that the owners personally tie the flies to

ensure high quality, the available time of the owners became the constraining factor.

The analysis of the paint making (PM) company suggested that there was a constraint

in shading process involving the final adjustments to the paint colours and physical prop-

erties. This process is performed after a set of processes such as premixing, grinding and

milling and requires the skills of a shader (an expert colour matcher) and a quality control

technician (who measures and adjusts the paint’s physical properties). This process always

resulted in a largest number of work-in-progress queued up waiting to be shaded and

checked.

Focusing step two: Decide how to EXPLOIT the system constraint(s)

Exploiting the constraints such as work centre WCB in the ADF Company means identi-

fying ways for getting maximum productivity from the constraint and making everyone, in

all functional areas and work centres, aware of its effects on the performance of the system

(Goldratt & Cox, 1992). The prime focus at this step is to take advantage of the existing

capacity at the constraint and to ensure that the available capacity is not wasted. For

instance, quality control check of the materials, before processing them on the constraint

resource, would ensure that the constraint time is not wasted on defective product. As the

goal is to increase throughput without increasing operating expenditure or inventory, two

important principles assist in this endeavour. The first principle says that the marginal

value of time at a constraint resource is equal to the throughput rate of the system (Prin-

ciple 1), and the second principle says that the manager should focus on synchronizing the

flow in the various work centers (Principle 2) (Cox & Spencer, 1998; Gupta, 2003).

Managerial implications – the ADF Company

The business owner will ensure that each functional area, as well as work centre, is aware

of the system constraint and encourages everyone to propose ideas or actions to attain the

optimal use of that resource within the framework of the proposed mindset and measure-

ment (discussed in the previous section). For example, the owner will determine the

optimal product mix to take advantage of the constraint. Since any loss of time in the

constraint is a loss in the system’s throughput (TOC Principle 1), the manager must

alter the product mix in such a way that every minute incurred in the constraint is utilised

to increase the company’s goal of making money. Also, priority will be given to the

product whose throughput per constraint minute is the highest on a per unit basis.

Table 3 shows that throughput per constraint minute for product FGF ($8.21) is greater

than that of product FGD ($4.26). Hence, the ADF Company can produce all 40 units

of FGF first (approximately 14 minutes/unit) and then, using leftover capacity of 1840

minutes (2400 – 560), process WCB to produce about 54 units of product FGD (approxi-

mately 34 minutes/unit). Product FGA is not processed on WCB and thus, market demand


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of FGA can be fully satisfied. Table 4 gives us the maximum feasible profit of $6,030 for

this product mix of 40FGA-54FGD-40FGF, which is an increase of $2,135 ($6,030 –

$3,895).

Such an approach to finding the optimal product mix is possible in the TWT environ-

ment where everyone understands the importance of optimising the constrained resource.

In a real world situation, we must do whatever it takes to satisfy the market (a necessary

condition) and if we cannot use the optimal product mix, employees must at least be aware

of the lost opportunity. For example, the marketing manager may begin by not promoting

product FGD and not selling more than 54 units/week of FGD. From Table 3, it can be

inferred that the selling price of product FGD should be increased to the extent that

throughput per constraint minute is equal with that of product FGF. The operations

manager has a more complex task in maximising the utilisation of work centre WCB

and finding ways to save time on this resource. He can take the following actions.

Focus process improvement and effective supervision related initiatives. The operations

manager targets the constrained operation, work centre WCB, for process improvement

in order to increase the throughput of the plant. In general, effective supervision of the con-

straint will be made using quality-circle teams. Such a team meets frequently to analyse

processes, and to identify and solve problems occurring in the company. In a TWT

environment, the team will assess all activities and operations of constraint to increase

the output of the plant. It will make sure that the constrained resource only processes

completely defect free material. To accomplish this, the plant manager might put the

inspection system before the constraint. Other actions which can improve the work

Table 3. Product mix analysis.

FGA FGD FGF

Throughput/unit 115 145 115Time on constraint 0 34 14Throughput per unit of resource Infinity 4.26 8.21Product mix 1st 3rd 2ndOptimal product 40 54 40

Note: Since product FGA does not use WCB, produce all FGA units. Produce all FGF units first and than FGD.

Table 4. Profit analysis of the optimal mix.

Products FGA FGD FGF Total

Market 40 54 40Selling price per unit $180.0 $240.0 $180.0Variable

Direct material #1 ($ per unit) $30.0 $30.0Direct material $35.0 $35.0Direct material $30.0Direct material $65.0

Throughput per unit ($) $115.0 $145.0 $115.0Total throughput ($) $4,600.0 $7,830.0 $4,600.0 $17,030.0Operating $11,000.0Net profit before $6,030.0

872 M. Gupta et al.

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flow are: (i) making the constraint work incessantly; and (ii) never allowing products to be

processed on constraint solely for inventory purposes.

As the ADF Company is theoretically a perfect company, such improvements are

already part of the process. In a real world company these improvements will significantly

increase the capacity of the constraint resource, resulting in an increase in throughput and

increasing the net profit of the company.

Implementation of a scheduling system. The plant manager will create a TOC-based sche-

dule, popularly known as Drum–Buffer–Rope (DBR) schedule (see Appendix), which

synchronises the flow in the various work centres with constraint resource (TOC Principle

2) in order to maximise the utilisation of constraint work centre WCB. According to the

DBR schedule, the non-constraint work centres WCG and WCC are released raw materials

(RMA, RMC, RME and RMF) to perform operations A26, C26, E26 G26 (that is, the rope)

as per the predetermined optimal product mix (the drum) 40FGA-54FGF-40FGD. In this

schedule, the prime focus is on the management of the constraint because throughput

rate of the plant depends on the speed of the constraint. Some inventory (the buffer) is

maintained in front of the constraint to protect it from remaining idle due to unavoidable

disruptions occurring in the former non-constrained processes. Thus, the DBR schedule

helps to decrease WIP inventory and operating expenses, thereby providing a competitive

advantage to increase future throughput.

In summary, from the TWT perspective, it is realistic for the ADF Company to

increase the effective capacity of work centre WCB by 12%, from 2400 to 2740

minutes (see Table 5) without incurring additional expenses by implementing a combi-

nation of one or more of the above decisions.1 The increase in capacity benefits the

company greatly because the constrained work centre can produce 10 more units of

product FGD (340/34), increasing throughput by $1,450 ($145 × 10). Net profit per

week will increase by $7,480, which is still far short of the potential $9,800 when all

the market demand is fulfilled.


After the constraints in the original installation process were identified, the ASA Company

redesigned the installation process in order to increase the technicians’ productivity. The

team installation process was implemented whereby all three technicians as a team would

complete each order, instead of each of them working at different orders separately. As a

Table 5. Utilisation of work centres after EXPLOIT.

Activities/workCenters/departments 40FGA 64FGD 40FGF

Required totaltime



0 2176 560 2736 2740 99.9%


Note: Work centre WCB is operating at design capacity. Additional capacity of 340 minutes per week isrecovered and 10 more units of FGD are produced. Throughput is increased by $1,450.


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team, the technicians had a choice as to which sub-process of installation process they

should complete first and to perform a number of sub-processes concurrently. Overall,

time taken for the entire process was reduced from 957 to 249 minutes.

The DE Company, in its attempt to exploit the time constraint, calculated throughput

per constraint minute of their time for each of the five main product types. The product

with high throughput on unit basis was found less preferable when the amount of con-

straint time employed to produce the product was factored in. Thus, suggesting that the

owners should switch their productive efforts produced a different product-mix and pro-

ducing/selling more of the profitable products.

The PM Company, in their attempt to implement this step, executed a new criterion

for the issuance of batch cards to trigger the release of raw material. This new method

initially stopped inflow of raw material in the process causing significant reduction to

the work-in-progress and subsequently enabled the workers to locate the next batch,

scheduled to be processed, relatively easily. Subsequently, a more accurate due date

was established by working more closely with the customers and thereby determining

the drum schedule.

Thus, in all three companies, the productive actions taken resulted in optimal use of the

constraint resource thereby increasing throughput without increasing inventory or operat-

ing expenses.

Focusing step three: SUBORDINATE everything else to the above decision

Once the constraint is identified and exploited, the third step is to determine its impact on

non-constrained resources, and to ensure that various local decisions support the global

goal of making more money. All non-constrained resources should be subordinated to

the constrained resource in order to enhance the performance of this resource. Three prin-

ciples of TOC support this step. The first principle says that resources must be utilised, not

simply activated (Principle 3). The second principle says that the marginal value of time at

a non-constraint resource is negligible (Principle 4). The third principle suggests that the

level of utilisation of a non-constraint resource is controlled by the constraints of the

system (Principal 5) (Cox & Spencer, 1998; Gupta, 2003).

‘Activation’ of a resource implies that the resource is used without regard to its need to

improve the system as a whole. If a non-constrained resource is ‘activated’, then it is creat-

ing inventory. The DBR schedule ensures that the right quantities of raw materials are

released to non-constrained resources to arrive to the constraint resource. The idea is

that the company should choose to idle non-constrained resources instead of using them

for the sake of keeping them active, a common mistake companies make which builds

unnecessary inventory. As in the second step, the decisions made at this step served to

increase throughput, reduce inventory and operating expenses without incurring

additional expenses.

Managerial implications – the ADF Company

Following TOC concepts and principles, the ADF Company makes a distinction between

resource ‘utilisation’ and ‘activation’. Following the decisions suggested in the second

focusing step, the plant manager ensures that work centre WCB works at full capacity

with all the assistance possible from non-constraint work centres. The following are

some of the decisions that can be taken to further increase throughput, reduce inventory,

and reduce operating expenses by utilising the non-constraint resources more efficiently.

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Implement the Drum-Buffer-Rope scheduling system. Understanding fully the principles 4

and 5 of TOC, the company ‘utilises’ non-constraint work-centres to synchronise the flow

of material into the constraint work centre by implementing a DBR schedule. The DBR

schedule ensures that non-constraint work-centres receive work in time and in just the

right quantities so that the constraint resource is optimised. Consequently, a clear

picture of excess capacity on the non-constraint resources emerges in the TWT environ-

ment, where managers are not pressured to improve efficiencies measured using traditional

accounting techniques.

Table 6 shows the percentage of utilisation of work centres after implementing

changes suggested in the previous step. The utilisation rates of non-constraint work

centres also imply that these resources are not being activated (that is, turning raw material

into WIP). Consequently, WIP inventory and, thereby, operating expenses decrease

significantly in the company. Note that in our quantitative analysis in various tables,

for simplicity we have chosen not to quantify these savings in operating expenses and

net profit.

Focus training/cross-training. Cross-training allows some processing of WCB constraint

to move to non-constraint work centres (WCC and WCG), increasing the utilisation of

non-constraint work centres. In the TWT environment, everyone knows that the level of

utilisation of non-constraint work centres is controlled by the constraints of the system.

In the ADF Company, it is conceivable that employees identify new ways to off-load

the work from constraint work centre WCB to non-constraint work centres WCC and

WCG. Employees at WCC are informally educated about the changed job operations.

For example, in Figure 2, we assume a net saving of 2 minutes per unit of product FGD

on operation E18 (from 28 to 26 minutes) and 2 minutes per unit of product FGF on oper-

ation G18 at work centre WCB (from 14 to 12 minutes) if we off-load some work to work

centre WCC. We assume that this off-loading will result in an increase of 10 minutes at

WCC on operations E27 (that is, from 9 to 19 minutes) and an increase of 10 minutes

at WCG on operation G27 (from 15 to 25 minutes), respectively (see Figure 2).

These changes result in an increase in throughput of six more units of FGD with increase

in the net profit of $870 ($145 × 6), as well as the utilisation of non-constrained

work centres. The net profit per week is directly increased by this amount to

$8,350, which is still a little short of potential $9,800 when all the market demand is

fulfilled.

Table 6. Utilisation of work centres after SUBORDINATION.


Required totaltime



0 2240 480 2720 2740 99.3%


Note: Off-load work centre WCB’s work to work centre WCC. Reduce per unit processing time by 2 minutes foroperations E18 and G18 on work centre WCB for products FGD and FGF. Increase per unit processing time by 10minutes for operation E19 on work centre WCC for FGD and 10 minutes for operations G27 on work centre WCGfor FGF.


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Reduce batch sizes on non-constraint resources. In general, batch size is a function of the

set-up time required for changing from one product to another one. The smaller the set-up

time, the smaller a batch can be released which, in turn, reduces WIP inventory in the

system. Products are scheduled to arrive at work centres in batches. In our ADF

Company we can assume that the raw material was released to produce a single batch

of 40FGA-64FGD-40FGF. In TOC, the set-up time at the constraint resource must be

the focus of process improvement.

Reducing the set-up time at the constraint can reduce batch sizes as long as the increase

in the number of set-ups does not create new constraints. Suppose the ADF Company

releases a batch of size 20FGA-32FGD-20FGF or even 10FGA-16FGD-10FGF on

regular intervals as per the Drum–Buffer–Rope schedule. This small batch production

will reduce WIP inventory in the Company significantly and, consequently, will reduce

operating expenses. Again, we note that in our quantitative analysis, we have not quanti-

fied these conceivable savings in operating expenses and the resulting increase in net

profit.

In short, the two focusing steps above have together increased throughput and reduced

inventory and operating expenses in a systematic manner. Most importantly, the reduction

in WIP inventory increases the company’s competitiveness by reducing lead-times,

increasing flexibility and improving quality. These factors will make the company more

attractive to current and potential customers, increasing sales in the near future.

Build cross-functional teams – build a learning organisation. Developing highly motiv-

ated cross-functional teams is a natural outcome of implementing and/or internalising

TOC concepts in a company. Such teams, which can be the backbone of a company,

also serve as the foundation for a learning organisation where everyone aligns their

individual goals with those of the company as a whole and ensures global optima that

is, the optimisation of the company as a whole.

Suppose, in ADF Company, a team consists of members from different functional

areas, such as marketing, engineering, accounting and operations, as well as from different

work centres in the operations department. The effectiveness of this cross-functional team

depends on team cohesiveness, which is supported by the TOC mindset, and team per-

formance, which is based on the TOC measurements. The team challenges conventional

ways of making localised decisions and finds innovative ways to increase throughput,

and to reduce inventory and operating expenses in that order of priority.

Exploit the market for Product FGA. In the ADF Company, since product FGA does not

use the constraint resource, the marketing department should give high priority to this

product and try to increase its demand. The only constraint for this product, in fact, is

the limited demand for it. In the TWT world, the marketing department exploits this

constraint by devising a strategy to increase demand for this product specifically. For

instance, the marketing manager might focus customer attention to the company’s new-

found competitive advantages in terms of superior services such as guaranteed on-time

delivery and better quality products.


In the real case studies, we saw applications of one or more these examples of subordina-

tion. In the ASA Company, the implementation of team structure resulted in various

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sub-processes in the installation process subordinating each other and additionally, each

team was working at one order at a time instead of each one working at different

orders. This effectively reduced the batch size from three to one unit. There was more

effective coordination between marketing and operations functions.

In the PM company, the upstream processes were synchronised to the pace of

constraint, resulting in the other processes having excess capacity. Next, the upstream

processes (such as research and development, where batches were developed and the

batch making process, where incoming batches are mixed) used excess capacity to

make sure their batches were more consistent and to monitor the quality of incoming

material from suppliers. All these efforts resulted in reduction in the process time at the

constraint, which increased the plant’s capacity.

The DE Company continued to produce all of the products but the authors suggested

the possibility of increasing the price of the less profitable flies without causing substantial

decrease in demand. This paper does not provide more details about this or subsequent

steps.

Focusing step four: ELEVATE the system’s constraint(s)

Elevating the constraints, the fourth focusing step, involves the decision to increase the

overall capacity of the constraint resource by spending money on it. If using funds to

buy more equipment or resource time will increase throughput, the company will likely

sacrifice some increase in inventory (that is, investment) and/or operating expense to do

so at this step. Depending on the type of investment, elevation can be of two types: tactical

and strategic.

Tactical elevation

Here, the plant manager prefers those alternatives that can satisfy market demand in a

short-term period, usually by scheduling overtime on the constraint machines or by out-

sourcing work temporarily. Although this strategy increases the operating expenses of

the company, it works for meeting short-term market demand. In the ADF Company,

for instance, 300 minutes/week overtime on work centre WCB (assuming a labour

charge of $10 per hour, an operating expense of $50 per week) will meet demand for

10 units/week of product FGD. This solution will create a throughput of $1,450 ($145

× 10), operating expense of $50, and net profit of $1,400 ($1,450 – $50).

In TOC terminology, this strategy is called the tactical elevation. It assumes that a con-

straint’s capacity can be increased relatively easily and inexpensively. Theoretically, it is

possible that a company could implement five-focusing steps iteratively a few times,

causing the constraint to move from one process to another until the constraint becomes

a resource, which is very expensive and/or a non-physical one. At this point, the

company would decide to implement strategic elevation.

Strategic elevation

The examples of strategic elevation of physical constraints might include expanding the

company or adding more capital equipment to increase capacity. The examples of elevat-

ing non-physical constraints might include options such as: (i) company-wide training and

education programmes to implement TOC; (ii) outsourcing certain components and/or raw

materials; and (iii) strategising the entry to new markets and/or introducing new products.


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Thus, strategic decisions have major implications for the company as a whole (including

various work centers, as well as functional areas).

Managerial implications: The ADF Company

In the TWT environment, once the company has implemented the first three focusing

steps, the company as a whole decides whether to elevate or not, and whether to elevate

tactically or strategically. The TWT company judges the investment by its impact on con-

strained resource, and takes into consideration any new constraints the investment might

cause. The various decisions such as make versus buy, acquiring new equipment, and pro-

ducing new product are re-evaluated to converge the various associated local actions into

global objective. The decisions are analysed as follows.

Make versus buy decision

Suppose that the purchasing manager has found a supplier who can produce a modified

raw material RMF at the cost of $66 per unit. If this supplier is used, the company does

not need to send the material for initial processing at work centre WCG for 15 minutes

per unit of processing (see Figure 2). From the TWT perspective, since work centre

WCG is not a constraint, buying a modified version of raw material RMF will result in

reduced throughput ($1 per unit of FGF), increased inventory (if raw material is released

in an attempt to keep WCG busy), and increased operating expenses. From a traditional

perspective, the accounting department might claim that the modified RMF represents a

net savings of $1.50, assuming labour charges approximately $10 per hour.

Investment decision

Suppose that the operations manager suggests an investment of $10,000 to acquire a tool

that will reduce the processing time for raw material RMF from 20 to 5 minutes at work

centre WCM, and thereby resulting in a saving of 15 minutes per unit (see Figure 2). From

the TWT perspective, work centre WCM is not a constraint. Therefore, this investment

will be a waste of $10,000 because it does not increase throughput of the company. Fur-

thermore, TOC inventory (investment) will increase by $10,000 due to the acquisition of

new equipment. Moreover, the work centre will be pressured to remain efficient, increas-

ing both WIP inventory and operating expenses. However, from a traditional perspective,

the accounting department might claim a saving of $2.50 per unit assuming labour charges

Table 7. Utilisation of work centres after tactical ELEVATION.


Required totaltime



0 2560 480 3040 3040 100.0%


Note: Overtime of 300 minutes is incurred on work centre WCB to produce the rest of product FGD and theutilisation of other non-constraint resources is also increased proportionately.

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of approximately $10 per hour and might argue that the investment can be recovered in 20

weeks because there is a demand for 40 units of FGF per week (40∗2.50∗20).

From a TWT perspective, again assume that the company considers acquiring a tool

that will make the constrained resource, work centre WCB, more efficient (even if by a

very small increment). This tool can reduce processing time for raw material RMF by 4

minutes, that is operation G18 from 12 to 8 minutes in Figure 2 (Note: an additional 2

minutes was assumed to be saved in the subordination step by cross training and off-

loading work to work-centre WCC). Under these assumptions, work centre WCB can

now produce 10 more units of FGD using the processing time saved on WCB for proces-

sing raw material RMF (i.e. 4 × 40 ¼ 160 minutes and 340 4 32 ¼ 10 units). Thus, the

purchase of this tool will enable the company to meet the total market demand for product

ADF. The company will be able to ship 80 units, increasing throughput by $1,450 ($145 ×10). The net profit per week is directly increased by this amount to $9,800 when all the

market demand is fulfilled.

New product development decision

Suppose that the marketing department worked very closely with the R&D, engineering,

and production departments and developed a new product, FGE. Figure 2 shows that

product FGE starts out as RMF ($65 per unit), and goes to work centres WCG–WCC–

WCM–WCW–WCC respectively for processing at the rate of (15+12+20+9+24) or

80 minutes. The question is: What selling price should the marketing department

recommend for this new product FGE?

From the TWT perspective, any price above the total raw material cost of $65 for this

new product will increase throughput/unit because the new product is produced on non-

constraint resources with enough excess capacities (see Table 7). Thus, the company

will be able to compete effectively on selling price dimension (if needed). However, in

the TWT environment, the company further avoids competing on cost and might

attempt to market this product by packaging it with its new found competitive advantages

such as better quoted due dates and better quality, and thereby makes an offer to the cus-

tomers they cannot refuse and/or even charge hefty premium price for this new product.

Conversely, from conventional perspective, the accounting manager might calculate the

selling price using the cost plus margin approach. Thus, assuming labour charges of

approximately $10 per hour and overhead charges of approximately 150% of labour

hours, per unit product cost would be $105 ($65 raw material cost + $16 labour cost +$24 overheads). The new product may not be introduced if the market is very competitive

and will not bear a price higher than $105. In this case, the engineering and operations

departments may be pressured to improve product design and process efficiencies to

make FGE more profitable.

Managerial implications: the success stories

In any of the three case studies from the literature, the companies did not implement the

fourth step of five focusing steps (at least authors did not discuss this step in the articles).

The possible conclusion can be either that enough excess capacity was unearthed that the

companies were busy fulfilling unmet demands and making money in the near future or the

scope of the project was limited to demonstrate the power of identifying and exploiting

the constraints.


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Focusing step five: GO TO step one, do not allow INTERTIA

The previous steps have put the ADF Company on an improvement process. This last

focusing step is an emphatic reminder to not to let inertia stop what should be an

ongoing improvement process. This step involves focusing on the strategic objectives of

the company while identifying the location of new constraints. More importantly, all

the decisions made at previous steps will be re-evaluated for their continued relevance

and applicability at this step.

Generally, once the most binding constraint is elevated, the constraint shifts either to

some other work centre (internal and physical) or to demand for products (external and

non-physical). As market demand is an external constraint, the plant manager may not

have much control over it, so efforts should be made to bring the constraint back inside

the company in order to be to be able to re-apply the five focusing steps. This is typically

done by making a strategic elevation decision in parallel with decisions to introduce new

products and increase demand for existing products.

Managerial implications: TWT perspective

In the ADF Company, due to various process improvement initiatives discussed under

steps two and three and to the investment made under step four, we notice in Table 7

that work centre WCB is still the constraint, with Work Centre WCC being the next

work centre with 87.5% utilisation. In addition, the current market demand for all three

products has become the most binding constraint. Thus, it seems that the company can

be satisfied either with the current level of net profit $9,800, by producing and shipping

40–80–40 units of FGA–FGD–FGF and realising that the market demand and work

centre WCB are the two binding constraints. Efforts need to be made to elevate these

constraints and then start the five focusing steps all over again.


As mentioned in the previous step, the real world companies discussed in the literature did

not discuss the implementation of fourth and, thus, also the fifth step of the five focusing

steps. The authors had demonstrated to the business managers or at least the operations

and/or accounting managers the usefulness of the constraint management in a limited

sense. The case studies did not discuss the implications of not following through the

fifth step to demonstrate its power as a continuous improvement process.

Conclusion

A successful implementation of TOC requires a paradigm shift, a shift in management

mindset, a shift in the usage of performance measures, and a shift in the process improve-

ment approach employed by the business owners/managers. In ADF Company, a theoreti-

cal company, and the real-world small businesses discussed in this paper, we have shown

how TOC-based framework improved production processes, continuously increasing

output of superior and consistent quality resulting in a high level of performance. We

have also demonstrated how focusing on higher throughput, lower inventories, and

lower operating expenses (in that order) can help the company to maintain higher

profitability on a sustainable basis and can later lead to the development of new products

for its market.

880 M. Gupta et al.

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TOC as an integrated framework of the 3Ms (mindset, measures, and methodology)

strengthens the internal supply chain of a small business in the hypothetical job-shop

environment, the ADF Company. The TOC mindset focuses on making money instead

of saving money, and ensures employee security and customer satisfaction. The TOC

methodology can greatly assist managers in increasing throughput, reducing inventory

and reducing operating expenses simultaneously. Thus, this study demonstrates the

inherent, unique characteristic features of TOC that make decision-making more effective

than the existing management philosophies.

Limitations and future research

One of the major limitations of this paper is the use of a hypothetical company to demon-

strate the applicability of the TOC-based framework. Although several small business

success stories have been reported in the professional journals such as the success

stories discussed in this paper, the discussion is very limited in scope, that is the

authors did not discuss how the managers’ mindset was changed to throughput-world

thinking. It seems that we still have an opportunity to discuss successful or even unsuc-

cessful TOC implementations highlighting the 3Ms of TOC. Additionally, it appears

that there are ample opportunities to prepare comprehensive cases for teaching purposes,

which discuss TOC implementations.

Although the number of actual TOC implementations and its acceptance by managers

is growing, the scientific research incorporating TOC concepts is still sparse. We are also

not aware of any empirical TOC research clearly delineating the theory of TOC. Such

research efforts would provide a useful set of scales for finding the real impact of

throughput world-thinking on the business performance (Gupta, 2003) in general and

for the small business in particular.

Last but not least, more recently the proponents of the TOC including Dr Goldratt have

argued more strongly in favour of the applications of the Thinking Processes (TP) to

address business problems (Boyd et al., 2001). This paper does not address the relationship

or integration of TP with the proposed framework. The authors believe that this area of

TOC research would be a new avenue for future research from the viewpoint of small

businesses.

Note

1. Of course, in real world companies, the constraint resource would not be functioning at its designcapacity (that is, 2400 minutes in the ADF Company), rather at some effective capacity level (say80%) or even at some rated capacity level (say 70%). An increase of 10–12% in the constraintcapacity is a realistic estimate according to the TOC published literature.

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Appendix

Side bar: Glossary of TOC terms (adapted from APICS Dictionary)

1. V–A–T analysis: A constraint management procedure for determining the general flowof parts and products from raw materials to finished products (logical product structure).

A V logical structure starts with one or a few raw materials, and the product expands into anumber of different products as it flows through its routings. The shape of an A logicalstructure is dominated by converging points. Many raw materials are fabricated andassembled into a few finished products. A T logical structure consists of numeroussimilar finished products assembled from common assemblies and sub-assemblies.Once the general parts flow is determined, the system control points (gating operations,convergent points, divergent points, constraints, and shipping points) can be identifiedand managed.

2. Drum-buffer-rope: The generalised technique used to manage resources to maximisethroughput. The drum is the rate or pace of production set by the system’s constraint.The buffers establish the protection against uncertainty so that the system can maximisethroughput. The rope is a communication process from the constraint to the gating oper-ation that checks or limits material released into the system to support the constraint.Buffers can be time or material and support throughput and/or due date performance.Buffers can be maintained at the constraint, convergent points (with a constraintpart), divergent points, and shipping points.

3. Buffer management: A process in which all expediting in a shop is driven by, what isscheduled to be in the buffers (constraint, shipping, and assembly buffers). By expeditingthis material into the buffers, the system helps avoid idleness at the constraint and missedcustomer due dates. In addition, the causes of items missing from the buffer are ident-ified, and the frequency of occurrences is used to prioritise improvement activities.


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improving the weakest link: a toc-based framework for small businesses

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