Ricardo Ernst

Top Management Program in Logistics & Supply Chain Management (TMPLSM)

Production and Operations ManagementProduction and Operations Management

66: The: Theory of Constraintsory of Constraints

2

The Goal is to “make money”

But what measures of “making money” do we use?

3

Financial Measures

• Net Profit– an absolute measure

• Return on Investment (ROI)– a relative measure (profit relative to

investment)

• Cash Flow– a survival measure

4

Productivity Measures

1. Has throughput increased?

Throughput rate = the sales rate

2. Has inventory decreased?

Inventory = $$ invested in things it intends to sell

3. Have operational expenses decreased?

Operating expenses = $$ spent to turn inventory into throughput

• Net profitan absolute measurement in dollars

• Return on investmenta relative measure based on investment

• Cash flowa survival measurement ....

• Throughputthe rate at which money is generated by the system through sales

• Inventoryall the money that the system has invested in purchasing things it intends to sell

• Operating expensesall the money that the system spends to turn inventory into throughput ....

Performance MeasurementFinancial

5

6

Du-Pont Ratio Analysis

MarketBook

Objective: Maximize Market/Book ratio

IncomeSales

SalesAssets

AssetsEquity (book)

Market valueIncome=

MarketBook = (ROS) (Turnover) (Leverage) (P/E ratio)

7

“A plant in which everyone is working all the time is very

inefficient”

“A plant in which everyone is working all the time is very

inefficient”

What do you think?

8

The Statistics of Dependent Events

• Per Goldratt, Rather than balancing capacities, the flow of product through the system should be balanced

Process Time (B)Process Time (A)

9

0

2

4

6

8

10

Inve

nto

ry (

L)

1.0Utilization,

0.80.60.2 0.4

Variability can create long queues when (utilization) approaches 1

Variability can create long queues when (utilization) approaches 1

L goes sky-high

Terminology Usedin “The Goal”

• Capacity• Expected output in period of time

• Bottleneck• Capacity less than (or at most equal to) demand

• Non-bottleneck• Capacity is greater than demand placed on resource

• Capacity-Constrained Resource (CCR)• Capacity is close to demand

Upstream BottleneckDemand < or = Bottleneck Capacity

X YBottleneck Nonbottleneck

Demand / reqs 200 units 200 unitsProcess time/unit 1 hour 40 minsSched. time 200 hours 200 hours

X Y Market

Case A

What happens ?

Upstream BottleneckDemand > Bottleneck Capacity

X YBottleneck Nonbottleneck

Demand / reqs 300 units 300 unitsProcess time/unit 1 hour 40 minsSched. time 200 hours 200 hours

X Y Market

Case B

What happens ? How to manage ?

Y X Market

Case C

X YBottleneck Nonbottleneck

Demand / reqs 200 units 200 unitsProcess time/unit 1 hour 40 minsSched. time 200 hours 200 hours

Downstream BottleneckDemand < or = Bottleneck Capacity

What happens ?

Y X Market

Case D

X YBottleneck Nonbottleneck

Demand / reqs 300 units 300 unitsProcess time/unit 1 hour 40 minsSched. time 200 hours 200 hours

Downstream BottleneckDemand > Bottleneck Capacity

What happens ? How to manage ?

How can Bottleneck set the pace if it is in the middle?

A B C D E F Market

16

A B C D E F

Bottleneck (Drum)

InventorybufferCommunication

(rope)

Market

Pull from the bottleneck

“Drum & Rope”

Managing with Constraints

• Identify pacing operations• Bottlenecks & capacity constrained resources

• Balance throughput across operations• Drive CCRs to max capacity• Manage idle time on non-CCRs

• Supplement CCR output to level of demand • Overtime• Alternate routings• Multiple-sourcing

18

Is a Bottleneck a “Good Thing” or a “Bad Thing”?

• A bottleneck indicates the process is unbalanced (The bottleneck has a lower capacity than other stations).

• A balanced process has constant capacities across all stations (no bottlenecks).