theory of constraints bates

Theory of ConstraintsTheory of Constraints

Dr. Seth BatesDr. Seth BatesAdvanced Manufacturing MethodsAdvanced Manufacturing Methods

Department of TechnologyDepartment of Technology

College of EngineeringCollege of Engineering

Seth P. BatesSeth P. Bates The Theory of ConstraintsThe Theory of Constraints page page 22

Theory of ConstraintsTheory of ConstraintsEliyahuEliyahu GoldrattGoldratt

•• The Theory of constraints was developed and The Theory of constraints was developed and popularized by manufacturing gurupopularized by manufacturing guru EliyahuEliyahu M. M. Goldratt in 1984. Most people are first exposed to Goldratt in 1984. Most people are first exposed to the concepts through his book the concepts through his book The Goal.The Goal.

•• In 1986In 1986 EliyahuEliyahu Goldratt formed theGoldratt formed the AvrahamAvraham Y. Y. Goldratt Institute. This institute was formed to inform Goldratt Institute. This institute was formed to inform people about TOC (The Theory of Constraints).people about TOC (The Theory of Constraints).


Dictionary Definition of a ConstraintDictionary Definition of a Constraint

11 the act of the act of constrainingconstraining

22 the state of being checked, restricted, or compelled to the state of being checked, restricted, or compelled to avoid or perform some action avoid or perform some action <the <the constraintconstraint and monotony of a monastic life and monotony of a monastic life ----Matthew Arnold> Matthew Arnold>

33 a a constrainingconstraining condition, agency, or force : condition, agency, or force : CHECKCHECK<put legal <put legal constraints constraints on the board's activities> on the board's activities>


TOC’sTOC’s Definition of a ConstraintDefinition of a Constraint

The most common question about the Theory of The most common question about the Theory of Constraints (TOC) is, "Huh?"Constraints (TOC) is, "Huh?"

Eli Goldratt defines a Constraint as, 'Anything that limits a Eli Goldratt defines a Constraint as, 'Anything that limits a system from achieving higher performance verses its system from achieving higher performance verses its goal.goal.‘‘

One definition used by Eli Goldratt for TOC (edited) is:One definition used by Eli Goldratt for TOC (edited) is:

‘‘A Thinking Process that enables people to invent A Thinking Process that enables people to invent simple solutions to seemingly complex problems.simple solutions to seemingly complex problems.''


Here's another definition (from Larry Leach): Here's another definition (from Larry Leach): http://www.http://www.srvsrv.net/~.net/~lleachlleach/TOC/defined./TOC/defined.htmhtm

The Theory of Constraints states that every system must have at The Theory of Constraints states that every system must have at least one constraint limiting its output.least one constraint limiting its output.

Consequences of the Theory:Consequences of the Theory:1. The more complex the system, the less independent process 1. The more complex the system, the less independent process paths exist, so the lower the number of constraints. (Usually, paths exist, so the lower the number of constraints. (Usually, complex systems have only one constraint at a given time.)complex systems have only one constraint at a given time.)2. A system of optimum processes can not be an optimum 2. A system of optimum processes can not be an optimum system.system.3. An optimum system runs the constraint (or bottleneck) at 3. An optimum system runs the constraint (or bottleneck) at optimum capacity (focused on the goal of the system), and all optimum capacity (focused on the goal of the system), and all other process steps must have excess capacity.other process steps must have excess capacity.


TOC’sTOC’s Definition of a ConstraintDefinition of a Constraint

•• A process or process step that limits throughput.A process or process step that limits throughput.

•• Anything that limits a system from achieving Anything that limits a system from achieving higher performance versus its goal.higher performance versus its goal.

•• A constraint is a factor that limits the system A constraint is a factor that limits the system from getting more of whatever it strives.from getting more of whatever it strives.


What is TOC?What is TOC?

•• The core idea of the Theory of Constraints is that every real syThe core idea of the Theory of Constraints is that every real system stem such as a profitsuch as a profit--making enterprise must have at least one constraint.making enterprise must have at least one constraint.

•• The TOC is a thinking process that enables people to invent simpThe TOC is a thinking process that enables people to invent simple le solutions to seemingly complex problems.solutions to seemingly complex problems.

•• The Theory of Constraint states that every system must have at The Theory of Constraint states that every system must have at least one constraint limiting output.least one constraint limiting output.

•• There is no choice in the matter; either you manage the constraiThere is no choice in the matter; either you manage the constraints nts or they mange you. The constraint will determine the output of or they mange you. The constraint will determine the output of the the system whether they are acknowledged and managed, or not.system whether they are acknowledged and managed, or not.


How does TOC help companies? How does TOC help companies?

•• Focuses improvement efforts where they Focuses improvement efforts where they will have the greatest immediate impact on will have the greatest immediate impact on the bottom line.the bottom line.

•• Provides a reliable process that insists on Provides a reliable process that insists on follow through.follow through.


Finding the focal point Finding the focal point

•• Before a company can properly focus, Before a company can properly focus, one necessary condition is that they one necessary condition is that they answer the following question:answer the following question:

What is the goal of a forWhat is the goal of a for--profit enterprise? profit enterprise?


The Goal The Goal

To make money now and in the future.To make money now and in the future.


The GoalThe Goal (more)(more)

•• Some would say that the goal of a Some would say that the goal of a company is:company is:

1)1) To satisfy customers.To satisfy customers.2)2) To provide satisfying jobs for employees.To provide satisfying jobs for employees.


The GoalThe Goal (more)(more)

•• TOC Recognizes that only the owner can TOC Recognizes that only the owner can choose the goal, however, once chosen, choose the goal, however, once chosen, the other two ‘goals’ become conditions to the other two ‘goals’ become conditions to achieving the goal.achieving the goal.


Measuring ProgressMeasuring Progress

•• Once the goal is identified, a necessary Once the goal is identified, a necessary condition to success in achieving the goal condition to success in achieving the goal is to identify which measurement(s) will be is to identify which measurement(s) will be used to judge progress.used to judge progress.


What measurements should we use? What measurements should we use? (Conventional Wisdom)(Conventional Wisdom)

•• Net Profit?Net Profit?•• Efficiency?Efficiency?•• Utilization?Utilization?•• ROI ROI (Return On Investment)(Return On Investment)??•• Cash Flow?Cash Flow?


What measurements should we use? What measurements should we use? (TOC Wisdom)(TOC Wisdom)

ThroughputThroughput

InventoryInventory

Operating ExpenseOperating Expense


What is: ThroughputWhat is: Throughput

•• The rate at which the system generates money through The rate at which the system generates money through sales minus raw materials and and purchased parts.sales minus raw materials and and purchased parts.

•• All the money received from customers minus raw All the money received from customers minus raw materials cost.materials cost.

•• The rate at which the system makes money(sales minus The rate at which the system makes money(sales minus totally variable costs). Direct labor should not be totally variable costs). Direct labor should not be deducted in calculating Throughput. Sales are only deducted in calculating Throughput. Sales are only recognized when money is available to the firm. That is, recognized when money is available to the firm. That is, production for inventory is not a part of throughputproduction for inventory is not a part of throughput


What is: InventoryWhat is: Inventory

•• All the money the system has invested in All the money the system has invested in purchasing things which it intends to sell. purchasing things which it intends to sell. Some insightsSome insights::

–– Inventory is a liability, not an asset. Inventory is a liability, not an asset. –– Raw materials and finished goods are inventory.Raw materials and finished goods are inventory.–– Machines and fixtures (if owned) are inventory.Machines and fixtures (if owned) are inventory.–– Scrap material that is to be sold is inventory until sold. Scrap material that is to be sold is inventory until sold.


What is: Operating ExpenseWhat is: Operating Expense

•• All the money the system spends in order to All the money the system spends in order to turn inventory into throughput.turn inventory into throughput.–– All employee time is operating expense.All employee time is operating expense.

–– Depreciation of a machine is a operating expense.Depreciation of a machine is a operating expense.

–– Scrap material thrown away.Scrap material thrown away.

–– All expenses not deducted in arriving at throughput. All expenses not deducted in arriving at throughput. This includes direct labor and all operating and This includes direct labor and all operating and maintenance expenses. maintenance expenses.


The Five Focusing StepsThe Five Focusing Steps

•• Identify a system's constraintsIdentify a system's constraints

•• Decide to exploit the system’s constraintsDecide to exploit the system’s constraints

•• Subordinate everything else to the above decisionSubordinate everything else to the above decision

•• Evaluate / Elevate the system’s constraintsEvaluate / Elevate the system’s constraints

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

•• Warning: Do not allow inertia to cause a system Warning: Do not allow inertia to cause a system constraint.constraint.


Step 1:Step 1:Identify the System’s Constraint(s)Identify the System’s Constraint(s)

•• In order to manage a constraint you must first In order to manage a constraint you must first identify it. In Eliidentify it. In Eli Goldratt’sGoldratt’s book book The Goal, The Goal, a a machine known as the ‘NCX10’ was identified asmachine known as the ‘NCX10’ was identified asthe constraint. the constraint.


Step 2: Step 2: Exploit the ConstraintExploit the Constraint

•• Once the constraint is Identified, the next step is Once the constraint is Identified, the next step is to focus on how to get more production within to focus on how to get more production within the existing capacity limitations. Goldratt refers the existing capacity limitations. Goldratt refers to this as to this as exploiting the constraintexploiting the constraint. .

An example of this from An example of this from The GoalThe Goal was when the was when the company and the labor union agreed to stagger company and the labor union agreed to stagger lunches, breaks, and shift changes so a machine lunches, breaks, and shift changes so a machine could run during times it previously sat idle.could run during times it previously sat idle.


Step 3:Step 3:Subordinate Everything to the ConstraintSubordinate Everything to the Constraint

•• Exploiting the constraint does not insure that the Exploiting the constraint does not insure that the materials needed next by the constraint will materials needed next by the constraint will always show up on time. always show up on time.

This is often because these materials are waiting This is often because these materials are waiting in order at a nonin order at a non--constraint resource that is constraint resource that is running a job that the constraint does not need running a job that the constraint does not need yet. Subordination is necessary to prevent this yet. Subordination is necessary to prevent this from happening.from happening.


Step 4:Step 4:Evaluate / Elevate the ConstraintEvaluate / Elevate the Constraint

•• After the constraint is identified, the available After the constraint is identified, the available capacity is exploited, and the noncapacity is exploited, and the non--constraint constraint resource have been subordinated, the next step resource have been subordinated, the next step is to determine if the output of the constraint is is to determine if the output of the constraint is enough to supply market demand. enough to supply market demand.

If so, there is no need to elevate because this If so, there is no need to elevate because this process is no longer the constraint of the process is no longer the constraint of the system. If not, elevate by adding resources.system. If not, elevate by adding resources.


Step 5: Step 5: Go Back to Step 1Go Back to Step 1

•• Step 5 is to go back and repeat step 1 and Step 5 is to go back and repeat step 1 and identify a new constraint, because there is identify a new constraint, because there is always one in every system. The fivealways one in every system. The five--step step process is then repeated for the next process is then repeated for the next constraint.constraint.


The Process of ChangeThe Process of Change

•• Simply stated, the thinking process involves the Simply stated, the thinking process involves the rigorous application of effectrigorous application of effect--causecause--effect logic effect logic to answer the following three questionsto answer the following three questions::

What to Change?What to Change?

What to Change to?What to Change to?

How to Cause the Change?How to Cause the Change?


What to Change?What to Change?

•• Pinpoint the core problems.Pinpoint the core problems.

The first question is equivalent to asking, “Where is the The first question is equivalent to asking, “Where is the constraint?” Since this process is generally used constraint?” Since this process is generally used when the constraint is not a physical resource, there when the constraint is not a physical resource, there is usually not physical evidence (such as work in is usually not physical evidence (such as work in process inventory) to point you to the constraint. process inventory) to point you to the constraint. Instead, you have to map what is currently going on in Instead, you have to map what is currently going on in your system. your system.

This leads to the “Current Reality Tree”.This leads to the “Current Reality Tree”.


the Current Reality Treethe Current Reality Tree

•• Instead of using physical evidence, you have to start with the Instead of using physical evidence, you have to start with the evidence that is available; the negative events that are apparenevidence that is available; the negative events that are apparent in t in the system.the system.Examples include: Examples include:

–– Frequently shipping orders late Frequently shipping orders late –– excessive amounts of inventory excessive amounts of inventory –– lead times that are increasinglead times that are increasing–– poor human relations within the organization.poor human relations within the organization.

•• Goldratt calls these Undesirable Effects, orGoldratt calls these Undesirable Effects, or UDEsUDEs. The challenge is . The challenge is to map out the interrelated web of causeto map out the interrelated web of cause--andand--effect that links the effect that links the undesirable effects together. Once completed, one is is generalundesirable effects together. Once completed, one is is generally ly able to identify a “core problem” at the bottom of the map.able to identify a “core problem” at the bottom of the map.


What to Change to? What to Change to?

•• The first step in determining the answer to this The first step in determining the answer to this question is to understand why the core problem question is to understand why the core problem exists.exists.

It is assumed that managers are not dumb. If there is It is assumed that managers are not dumb. If there is an easy solution to this core problem it would have an easy solution to this core problem it would have been solved a long time ago. There must be some been solved a long time ago. There must be some conflict that underlies the core problem. Once this is conflict that underlies the core problem. Once this is identified, the thinking process is used to develop a identified, the thinking process is used to develop a breakthrough idea that will resolve a conflict. This is breakthrough idea that will resolve a conflict. This is done by using a tool known as evaporating clouds.done by using a tool known as evaporating clouds.


What to change to? What to change to? (more)(more)

•• In order to do this you must use simple In order to do this you must use simple and practical solutions.and practical solutions.


How to cause the change?How to cause the change?

•• In order to cause the change you must In order to cause the change you must induce the appropriate people to invent induce the appropriate people to invent such solutions. Using methods like the such solutions. Using methods like the Socratic method can have this effect.Socratic method can have this effect.


ConclusionConclusion

•• The Theory of Constraints is about two The Theory of Constraints is about two things:things:

•• Focus Focus •• Follow throughFollow through

………..………..

•• and of course, making money! and of course, making money!


ResourcesResources

•• Levinson, William A., P.E., MBA.Levinson, William A., P.E., MBA. Goldratt'sGoldratt's Theory of Theory of Constraints: Online SimulationConstraints: Online Simulation, at, athttp://www.ganesha.org/leading/toc.htmlhttp://www.ganesha.org/leading/toc.html

•• Leach, Larry.Leach, Larry.http://www.http://www.srvsrv.net/~.net/~lleachlleach/TOC/defined./TOC/defined.htmhtm


ReferencesReferences

•• Goldratt, Eli, Goldratt, Eli, It’s Not Luck.It’s Not Luck. The NorthThe North River Press, Great River Press, Great Barrington, MA, 1994Barrington, MA, 1994

•• Goldratt, Eli, Goldratt, Eli, What Is This Thing Called The Theory Of What Is This Thing Called The Theory Of Constraints?Constraints?, The North River Press, Great, The North River Press, Great BarrringtonBarrrington, , MA, 1990MA, 1990

•• DettmerDettmer, William, , William, Eli M. Eli M. Goldratt’sGoldratt’s The Theory of The Theory of Constraints, A Systems Approach to Continuous Constraints, A Systems Approach to Continuous ImprovementImprovement, , 1996, ASQC press1996, ASQC press..

theory of constraints bates

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