THE GOALA PROCESS OF ONGOING

IMPROVEMENT

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Turn your sales level into your net profit level in about four years,

And sustain the exponential net profit increases beyond that

MAKE YOUR COMPANY ACHIEVE

THE VIABLE VISION

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THEORY OF CONSTRAINTS

A Thinking Process that enables people to invent

simple solutions to seemingly complex

problems

Anything that limits a

system from achieving

higher performance

verses its goal

There is no choice in the matter; either you manage the constraints or they manage you.

The constraint will determine the output of thesystem whether they are acknowledged and managed, or not.

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1. THE GOAL IS TO MAKE MONEY NOW AND IN THE FUTURE

BUSINESS MODEL

Operational

expense

Inventory

Throughput Throughput

• The rate at which the system generates money through sales

Inventory

• All the money that system has invested in purchasing things which it intends to sells

Operational expense

• All the money the system spends in order to turn inventory into throughput

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THROUGHPUT

• All the money received from customers minus raw materials cost

• Direct labor should not be deducted

• Sales are only recognized when money is available to the firm

• production for inventory is not a part of throughput

INVENTORY

• Inventory is a liability, not an asset.

• Raw materials and finished goods are inventory.

• Machines and fixtures (if owned) are inventory.

• Scrap material that is to be sold is inventory until sold

OPERATING EXPENSES

• 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.

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Dependent events

Processes that must first take place before other ones can begin

Manufacturingsituation

Statistical fluctuations

Uncertainties or when one is unable to

precisely predict events or quantities

2. WHAT IS THE CONSTRAINTS??

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FIVE FOCUSING STEPS

Identify a system's constraints

Decide to exploit the system’s constraints

Subordinate everything else to the above decision

Evaluate / Elevate the system’s constraints

If in the previous steps a constraint has been broken, go back to step 1. That is, find a new constraint.

WARNING !!!!Do not allow inertia to cause a system constraint.

focus on how to get more production within

the existing capacity limitations

insure that thematerials needed next by

the constraint willalways show up on time.

determine if the output of the constraint is

enough to supply market demand

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MEASUREMENT USED TO JUDGE THE COMPANY :

Net Profit = Throughput – Operational Expense 1

Return on Investment = Net Profit / Inventory2

Productivity = Throughput / Operational Expense3

Turnover = Throughput / Inventory4

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TRADITIONAL MODEL :

FORECASTINGEFFICIENCYTRADITIONAL

MODEL

• The goal is constantly to reduce cost of production and keep processes running at maximum efficiency.

It is most efficient to have every worker and all machines running constantly at 100%. If this is the case, a company gets the most out of their investment in the labor force.

• In many cases, this model is on a microlevel because it accounts for specific areas of the system instead of focusing on the entire system.

Companies realize that 100% is a utopian figure and scale it to an acceptable range of 85% to 95%.

This efficiency rating is then used to forecast how long it will take for processes to occur and a production schedule can be determined.

Oftentimes this schedule is inaccurate and companies miss out on opportunities to make money.

Instead of focusing on the actual capacity of the entire

system, capacities are determined for individual

stages, limiting the company’s ability to make money.

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(1) the overall system has not scaled production to the system with lowest capacity

(2) the system wastes money bystocking excess inventory that is not immediately converted to throughput, yet raises

operationalexpense.

EXCESS INVENTORY indicates….

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Throughput is important

element

100% efficiency plants are highly

unproductive

It is wrong to run plants at their highest

efficiency rating

Throughput constant,

operational expense increase

Lower productivity net profit decrease,

excess inventory created

Inventory increased, throughput constant

turnover decrease

100% EFFICIENCY DO NOT FUNCTION WELL

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THEORY OF CONSTRAINTSarea

TOC

For production Drum-Buffer-

Rope scheduling

For projects Critical Chain

Project Management

For finance and measures

Throughput Accounting

For marketing the

compelling, un-refusable “Mafia Offer”

For sales Buy-In Process

For anything else,

Thinking Processes

For distribution and supply

chain Replenishment

For people

Management Skills

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THINKING PROCESSES

PROCESS OF

CHANGE

HOW TO CAUSE THE CHANGE?

WHAT TO CHANGE

TO??WHAT TO

CHANGE ?

Instead of using physical evidence, you have to start with the evidence that is available;

the negative events that are apparent in the system

It is assumed that managers are not dumb. If there is an easy solution to this core problem it would have been solved a long time ago.

There must be some conflict that underlies the core problem. Once this is identified, the thinking process is used to develop a breakthrough idea that will resolve a conflict.

In order to cause the change you must induce the appropriate people to invent such solutions

Undesirable Effects, or UDEs.

The challenge is to map out the interrelated web of cause-and-effect that links the undesirable effects together.

Once completed, one is generallyable to identify a “core problem” at the bottom of the map.

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Drum-Buffer-Rope Scheduling

Embraces the concept that there is one constraint for the entire organization. If the constraint is internal, the company cannot sell all that is demanded

from the company. • Due-date performance is probably less than 99%, • lead-times may be longer than desired.

On the other hand if the constraint is external,• the company does not have enough sales to fully utilize its available

resources. • More sales are desired.

Implementing DBR brings a company to 99+% due-date performance (DDP) and maintains that level even with rapid sales growth.

It can be implemented in a very short time. Typically, 50% capacity can be freed up to sell with little or no investment or added expense.

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Mafia - Offer

A Mafia Offer is an offer so good that your customer can’t refuse it and your competition can’t or won’t offer the same.

Developing and implementing a Mafia Offer is not trivial, but having one improves typical closing rates from less than 5% to as much as 80%,

So Additional sales people aren’t required, but sales funnel management is.

The Theory of Constraints is always about two things:

• Focus• Follow through………..• and of course, making money!