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232 Chapter Twenty-Three Copyright 2014 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin

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233 Copyright 2014 by McGraw Hill Education (India) Private Limited. All rights reserved. LO231: Explain the Theory of Constraints (TOC). LO232: Analyze bottleneck resources and apply TOC principles to controlling a process. LO233: Compare TOC to conventional approaches. LO234: Evaluate bottleneck scheduling problems by applying TOC principles.

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234 Copyright 2014 by McGraw Hill Education (India) Private Limited. All rights reserved. Do not balance capacity, balance the flow. The level utilization of a non-bottleneck resource is not determined by its own potential but by some other constraint in the system. Utilization and activation of a resource are not the same. An hour lost at a bottleneck is an hour lost for the entire system. An hour saved at a non-bottleneck is a mirage.

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235 Copyright 2014 by McGraw Hill Education (India) Private Limited. All rights reserved. Bottlenecks govern both throughput and inventory in the system. Transfer batch may not, and many times should not, be equal to the process batch. A process batch should be variable both along its route and in time. Priorities can be set only by examining the systems constraints, and lead time is a derivative of the schedule.

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236 Copyright 2014 by McGraw Hill Education (India) Private Limited. All rights reserved. Identify the system constraints. Decide how to exploit the system constraints. Subordinate everything else to that decision. Elevate the system constraints. If, in the previous steps, the constraints have been broken, go back to step 1, but do not let inertia become the system constraint.

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237 Copyright 2014 by McGraw Hill Education (India) Private Limited. All rights reserved. The goal of a firm is to make money.

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238 Copyright 2014 by McGraw Hill Education (India) Private Limited. All rights reserved. Net profit An absolute measurement in dollars Return on investment A relative measure based on investment Cash flow A survival measurement

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239 Copyright 2014 by McGraw Hill Education (India) Private Limited. All rights reserved. Throughput The rate at which money is generated by the system through sales Inventory All the money that the system has invested in purchasing things it intends to sell Operating expenses All the money that the system spends to turn inventory into throughput

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2310 Copyright 2014 by McGraw Hill Education (India) Private Limited. All rights reserved. Productivity typically measured in terms of output per labor hour. Does not guarantee profitability. Has throughput increased? Has inventory decreased? Have operational expenses decreased? Productivity is all the actions that bring a company closer to its goals.

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2311 Copyright 2014 by McGraw Hill Education (India) Private Limited. All rights reserved. In earlier chapters, we discussed balancing assembly lines. The goal was a constant cycle time across all stations. Synchronous manufacturing views constant workstation capacity as a bad decision. Random variations must be handled using inventory. When one process takes longer than the average, the time can not be made up.

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2312 Copyright 2014 by McGraw Hill Education (India) Private Limited. All rights reserved. Capacity: the available time for production Bottleneck: what happens if capacity is less than demand placed on resource Non-bottleneck: what happens when capacity is greater than demand placed on resource Capacity-constrained resource (CCR): a resource where the capacity is close to demand on the resource

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2313 Copyright 2014 by McGraw Hill Education (India) Private Limited. All rights reserved.

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2314 Copyright 2014 by McGraw Hill Education (India) Private Limited. All rights reserved.

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2315 Copyright 2014 by McGraw Hill Education (India) Private Limited. All rights reserved. Setup time: the time that a part spends waiting for a resource to be set up to work on this same part Process time: the time that the part is being processed Queue time: the time that a part waits for a resource while the resource is busy with something else

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2316 Copyright 2014 by McGraw Hill Education (India) Private Limited. All rights reserved. Wait time the time that a part waits not for a resource but for another part so that they can be assembled together Idle time the unused time that represents the cycle time less the sum of the setup time, processing time, queue time, and wait time

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2317 Copyright 2014 by McGraw Hill Education (India) Private Limited. All rights reserved. Run a capacity resource profile Obtained by looking at the loads placed on each resource by the products that are scheduled through them Use your knowledge of the particular plant Look at the system in operation Talk with supervisors and workers

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2318 Copyright 2014 by McGraw Hill Education (India) Private Limited. All rights reserved. Bottlenecks govern both throughput and inventory in the system. An hour lost at a bottleneck is an hour lost for the entire system. An hour saved at a non-bottleneck is a mirage.

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2319 Copyright 2014 by McGraw Hill Education (India) Private Limited. All rights reserved.

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2320 Copyright 2014 by McGraw Hill Education (India) Private Limited. All rights reserved. More tolerant than JIT systems Excess capacity throughout system Except for the bottleneck Quality control needed before bottleneck

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2321 Copyright 2014 by McGraw Hill Education (India) Private Limited. All rights reserved. What is the batch size? One? Infinity? Larger batch sizes require fewer setups and therefore leave more time for processing. Desirable for bottleneck resources. For non-bottleneck resources, smaller batch sizes are desirable. Reduces WIP inventory.

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2322 Copyright 2014 by McGraw Hill Education (India) Private Limited. All rights reserved. A bottleneck With no setup required when changing from one product to another Process jobs in the order of the schedule. Without setups, only sequence is important. With setup times required to change from one product to another Large batch sizes combine separate jobs into the sequence. This means reaching ahead in the schedule. Some jobs will be done early. Large batches saves setup and increases throughput.

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2323 Copyright 2014 by McGraw Hill Education (India) Private Limited. All rights reserved. A capacity constrained resource (CCR) With no setup required to change from one product to another With setup time required when changing from one product to another Handling similar to a non-bottleneck Smaller batches so there can be more frequent changes of product Decreased lead time

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2324 Copyright 2014 by McGraw Hill Education (India) Private Limited. All rights reserved. Traditional view is the only negative impact of inventory is carrying cost. However, can also lengthen lead times and create problems with engineering changes. Less WIP reduces the number of engineering changes.

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2325 Copyright 2014 by McGraw Hill Education (India) Private Limited. All rights reserved. Marketing Discourages holding large amounts of finished goods inventory Purchasing Discourages placing large purchase orders that, on the surface, appear to take advantage of quantity discounts Manufacturing Discourage large work-in-process and producing earlier than needed Project management Quantify a projects limited resource investment as a function of time

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2326 Copyright 2014 by McGraw Hill Education (India) Private Limited. All rights reserved. MRP Uses backward scheduling. Schedules through a BoM explosion. MRP develops capacity utilization profiles. Trying to smooth capacity is difficult. Synchronous manufacturing Uses forward scheduling. This ensures a feasible schedule. Batch sizes can vary.

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2327 Copyright 2014 by McGraw Hill Education (India) Private Limited. All rights reserved. JIT is limited to repetitive manufacturing. JIT requires a stable production level. JIT does not allow very much flexibility in the products produced. JIT still requires work-in-process when used with Kanban so that there is something to pull. Vendors need to be located nearby because the system depends on smaller, more frequent deliveries.

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2328 Copyright 2014 by McGraw Hill Education (India) Private Limited. All rights reserved. Accountings influence Global measurements show net profits, ROI, and cash flow. Local cost accounting measurements show efficiency or utilization rates. Marketing and production Marketing and production should work in harmony. In practice, they act independently. Data for evaluating marketing and manufacturing are different.

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2329 Copyright 2014 by McGraw Hill Education (India) Private Limited. All rights reserved. For a set of production processes described in Exhibit 23.14, with the data given in the table below, what should be the products produced and what should be the quantities of those products? Product Limiting Resources Time Required (min) Number produced per hour Selling price ($) Sales revenue per hour ($) AY10650300 BX61075750 CZ51260720

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2330 Copyright 2014 by McGraw Hill Education (India) Private Limited. All rights reserved.

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2331 Copyright 2014 by McGraw Hill Education (India) Private Limited. All rights reserved. Solution Three different objectives could exist that lead to different conclusions 1. Maximize sales revenue because marketing personnel are paid commissions based on total revenue. 2. Maximize per unit gross profit. 3. Maximize total gross profit. In this example, we use gross profit as the objective and provide a solution. Other objectives can be worked out similarly.

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2332 Copyright 2014 by McGraw Hill Education (India) Private Limited. All rights reserved. We can solve this problem by finding either Total gross profit for the period Rate at which profit is generated We use rate to solve the problem both because it is easier and because it is a more appropriate measure. We use profit per hour as the rate. Note that each product has a different work center that limits its output. The rate at which the product is made is then based on this bottleneck work center.

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2333 Copyright 2014 by McGraw Hill Education (India) Private Limited. All rights reserved. Conclusion: It is clear that product C provides the highest profit per hour and in order to maximize total gross profit, one should produce as much of the C as possible. Product Limiting Workcen- ter Time Required (min) Number produced per hour Selling price ($) Raw material cost($) Profit per unit ($) Profit per hour ($) AY106502030180 BX610756015150 CZ512604020240