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Theory of Constraints

30th Dec12

Whats TOC

A New management Philosophy

As TQM, JIT, Flow manufacturing, Lean Manufaturing, BPR, SMED Continuous improvement and Business/organizations reengineering Tools and methods Production scheduling, Finances, Marketing, Project management, Conflict resolution,
Do not contradict them: Help focusing effort.

Thinking Process

Applications

ISAThe Instrumentation, Systems, and Automation Society

Basics of Business
The goal of the business is to make Money now & in Future
Generally accepted measures are: Profit Return on Investment Cash Flow We do not Question the validity of these measures. However we do question the usefulness of these measures as operational measures. For the average employee, seeing the effect that any given action has on Net Profit (NP) or Return on Investment (ROI) is almost impossible. As a result we have created local measures such as efficiency & utilization & we believe that they are linked to NP or ROI. However inspite of improvement in these operational metrics more than 99% of the organizations fail to achieve the above goal* * - The Economic times 24th Sept 2005)

New Operational measures


Throughput (T) Investment (I) Operating Expenses (OE)
Throughput: The rate at which Contribution Rupees are coming into organization Thus T = (net Sales All truly variable cost) Investment (I): All the money currently tied up inside the system (Inventory, Assets, Receivables etc) Operating Expenses (OE): All the money that system spends on converting inventory into throughput. All the expenses are clubbed together as OE and are thought as fixed (Employee expenses etc)

Financial links with the new Operational Measures


P = T OE ROI = P / I = (T OE) / I Thus improving Throughput, Investment & Operating expenses have a positive Co-relation with improving the financial metrics. All the new operational metrics should be used to guide our day to day actions to make money now and in future.

Theory of constraints
The core idea in Theory of constraints is that every real system such as an enterprise must have at least one constraint (such as Supply, Operations or Market) that limits the system to achieving its goal. The constraint is not static and may shift; but there can not be any situation when there is no constraint. If there is no constraints then the profit of the organization would have been infinite!

Basics of TOC
The Constraints are neither good or bad but are the facts of life. There is really no choice in the matter. Either you manage the constraints or the constraints will manage you. The constraints decide the output of the organization

Organization as Chain
In TOC the organization is compared to a chain. The activities that constitute a business are Chain of dependant events. As the strength of the chain is decide by the weakest of its link; similarly the output of the organization is decided by the constraints or the weakest area.

Steps of TOC
The TOC process seeks to identify the constraint and restructure the rest of the organization around it, through the use of the Five Focusing Steps:
1. Identify the Constraint
2. Exploit the Constraint

3. Sub ordinate everything (Policies, decisions and proced to exploiting the Constraint 4. Elevate the Constraint

5. Avoid inertia i.e. Repeat Constraint

Application of TOC
There are various applications of TOC: Operations Finance & accounting Project Management Sales & Marketing

THEORY OF CONSTRAINTS area

For production Drum-BufferRope scheduling

For people Management Skills

For projects Critical Chain Project Management

For distribution and supply chain Replenishment

TOC

For finance and measures Throughput Accounting

For anything else, Thinking Processes For sales Buy-In Process

For marketing the compelling, un-refusable Mafia Offer

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Throughput World vs Cost World


Because The only way to achieve good cost inventory performance is through good lcal goes up
performance everywhere
Control Cost Manage well Protect Throughput Manage according to Throughput World Manage according to Cost World

There is no way to achieve good throughput performance through good local performance everywhere

TRADITIONAL MODEL :

Instead of focusing on the actual capacity of the entire system, capacities are determined for individual stages, limiting the companys ability to make money.

TRADITIONAL MODEL

EFFICIENCY

FORECASTING

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.
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.
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.

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THINKING PROCESSES
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.

WHAT TO CHANGE TO?? HOW TO CAUSE THE CHANGE?

WHAT TO CHANGE ?

Undesirable Effects, or UDEs.

PROCESS OF CHANGE

The challenge is to map out the interrelated web of cause-and-effect that links the undesirable effects together.
Once completed, one is generally able to identify a core problem at the bottom of the map. 14

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

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 cant refuse it and your competition cant or wont 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 arent required, but sales funnel management is.

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TOC : Tools

CRT : Current Reality Tree

Describe the present situation Resolve hidden conflicts

CRD : Conflict Resolution Diagram

FRT : Future Reality Tree


Verify the action produces what is expected Identify negative outcomes of the intended action Identify obstacles and the best way to overcome them Build the sequence we need to complete the major milestones Detailed step-by-step instruction for implementing a course of actions Rules that govern the construction and review of trees
ISAThe Instrumentation, Systems, and Automation Society

PRT : Prerequiste Tree


TT : Transition Tree

CLR : Categories of Legitimate Reservations

Tools overview
Current Reality Tree Undesirable Effects Intermediate Effects Root Causes, Core Problem Conflict Resolution Diagram Objective Requirements Prerequisites Future Reality Tree Desired Effects Intermediate Effects Injections

Transition Tree Objective Intermediate Effects Specific Action Prerequisite Tree Objective Obstacles, Intermediate Objectives

ISAThe Instrumentation, Systems, and Automation Society

CRT : Current Reality Tree

Describe the present situation Problem analysis tool Identify the constraint, the Core Problem From UDE to Core Problem

The plant grows

Ambiant temperature range is available

Adequat water exist

Adequat nutrition exist

Adequat sunlight exist

Water is available

Water is not polluted

Nutrition is available

Nutrition is appropriate for the plant

Plant requires sunlight

Direct sunlight is available

ISAThe Instrumentation, Systems, and Automation Society

CRT : Identify the Core Problem


The Core problem is responsible for 70 % or more for the majority of UDEs UDE = Undesirable Effect RC = Root Cause CP = Core Problem
UDE UDE UDE

UDE RC

UDE

RC RC

CP
ISAThe Instrumentation, Systems, and Automation Society

CRD : Conflict Resolution Diagram


Most core problems exist because of some underlying conflicts Resolve hidden conflicts Creative Engine or Idea Generator No compromize, win-win solutions
I must In order to have
Requirement #1 Ensure Sharon safety

In order to have

I must
Prerequisite #1 Sharon home before 10 Injection Daddy gives her a ride

Check Assumptions
R1->PR1 Anxious about the return travel Bad boys may be there R2->P2
Do not leave before the party ends

Objective Have a good family life

Creat injection
R1->PR1 Daddy gives her a ride => The conflict is broken

Requirement #2 Sharon is accepted by her friends

Prerequisite #2 Sharon home around 12

ISAThe Instrumentation, Systems, and Automation Society

FRT : Future Reality Tree


Testing of new ideas Reveals potential devastating effects Gasoline consumption Reveals negative branches that worsen is reduced problems Elaboration of positive reinforcing I increase tire loops Higher tire pressure Persuading tool to pressures convince decision reduce makers gasoline Initial planning tool consumption

Gasoline expenses go down even more

Gasoline expenses are down

My engine runs smoothly

Smooth engine use less gasoline

I have an engine setup

My cars engine runs poorly

ISAThe Instrumentation, Systems, and Automation Society

FRT Notation
DE = Desirable Effect Injections = Proposed actions
DE DE DE

DE Injection Injection

Injection
ISAThe Instrumentation, Systems, and Automation Society

PRT : Prerequisite Tree


I always get to work on time

(Objective) (Obstacle)

Identify obstacles in realizing an objective Identifies remedies to obstacles Identify required sequence of actions Identify unknown steps Bridge the gap between FRT (major milestones) and TT (step-by-step implementation plan)

My transportation is unreliable

I am delayed in traffic

(Condition)

I use alternate transportation

I use alternate (Intermediate Objective) routes


Alternate routes take longer

Riding the bus takes longer (Action) I dont have the right clothes to wear

I leave early

Unexpected crises occur at home as Im leaving

I keep a ready I have back-ups supply of clean to deal with clothes on hand crises
Build downward until branches converge / the lowest IO is within control
ISAThe Instrumentation, Systems, and Automation Society

PRT Notation
PRT OBJECTIVE

OBS = Obstacles IO = Intermediate objectives

OBS

OBS

OBS

IO
OBS OBS

IO
OBS

IO

IO
OBS

IO
OBS

IO

IO
OBS

IO

IO
ISAThe Instrumentation, Systems, and Automation Society

TT : Transition Tree

I have located for job opportunities suitable for my qualifications

Provide step-by-step I have a short list of method for I apply for jobs on action/implementation job opportunities in my my short list Enable effective navigation chosen field that match through a change process my qualifications. Detect deviation in progress toward a limited objective Adapt or redirect effort, should plans change I have little jobCommunicate reasons for I narrow my chhoice All possible job action to others related experience to entry-level openings in my Execute the injections in my chosen field. positions chosen field are developped in CRD/FRT identified Attain intermediate objectives identified in PRT Develop tactical from conceptual / strategic plans Preclude UDE from arising I dont know where I ask respected I research resources out of implementation to look for possible faculty members at the campus career action
job opportunities. for career advice. center
ISAThe Instrumentation, Systems, and Automation Society

TT Notation
Objective

Reality / Need

Effect

Action

Reality / Need

Effect

Action

Reality / Need

Effect

Action

Reality / Need

Effect

Action

ISAThe Instrumentation, Systems, and Automation Society

CLR : Categories of Legitimate Reservations

Clarity

Meaning concern, no reasonnable cause-effect connection Completness, Structure (compound), Validity (The sky is falling) Does the cause really result in effect The stated cause for the considered effect seems not enough Other causes may result in the same effect If many fishermen are fishing and their stringers are full of fish then fishing is good Most causes result in more than one effect Circular logic : France football team lost the game because they played poorly
ISAThe Instrumentation, Systems, and Automation Society

Entity Existence

Causality Existence

Cause insufficiency

Additional Cause

Cause-Effect Reversal

Predicted Effect Existence

Tautology

Summary

TOC is a management philosohy


Common sense based Apply in all domains of life

TOC is a prescriptive theory

That provides effective tools to support and apply concepts

TOC Thinking processes

Applying to all situations (what to change, what to change to, how to cause the change)
Proven results in many areas Often chokes common practices

TOC applications

Relatively slow spread

ISAThe Instrumentation, Systems, and Automation Society

Glossary

PRT : Prerequisite Tree CLR : Categories of Legitimate Reservations

CP : Core Problem
CRT : Current Reality Tree CRD : Conflict Resolution Diagram = Evaporating Cloud DBR : Drum-Buffer-Rope DE : Desired effect

FRT : Future Reality Tree


IO : Intermediate objective OBS : Obstacles POOGI : Process Of OnGoing Improvement PRT : Prerequisite Tree RC : Root Cause UDE : Undesirable effect
ISAThe Instrumentation, Systems, and Automation Society