1 Introduction to the Theory of Constraints J.Skorkovský, PhD.; KPH ESF MU 2 Introduction nTheory of Constraints - TOC) was formulated approximately in 1980 in the USA. Some important roots of this theory were connected to the ideas incorporated in programs for planning and production control (Optimized Production Technology) 3 Introduction nAuthor: Eliyahu Moshe Goldratt Make money !!! 4 The Goal by Eliyahu Goldratt nThe goal of a manufacturing company? 5 Introduction -novels nTOC has became popular particularly thanks to the novels : nThe Goal - A Process of Ongoing Improvement nIt´s Not Luck nThe Race nThe Critical Chain nThe Haystack Syndrome nNecessary But Not Sufficient nLate night discussion nTOC was together with TQM (Total Quality Management ) and JIT (Just-In-Time) TOC classified as one of the most important managerial methods of the last two decades of the twentieth century . 6 Some impacts of TOC implementation 7 Some impacts of TOC implementation nFord Motor – Electronics Div. n nRevenue: $3,000,000,000 nNumber of employees: 15,000 nImplementation Date: 1991 nTOC Applications: DBR nComment: Drum-Buffer-Rope : will be presented later in this course) n n 8 Some impacts of TOC implementation nIMPLEMENTATION RESULTS nInventory Decrease: Reduced 100 million dollars (50%) nOn-time performance: From 89% - to 98% nLead times: From 6.4 days with JIT to 2.6 days nCost efficiency: Reduced floor space by 57% nQuality: Reduced quality defects by 50% 9 LEAD Time explanation-purchase Quantity Time Date of Purchase order Placement Date of Delivery Lead time Ordered Quantity 10 LEAD Time explanation-purchase 11 LEAD Time explanation-production 12 Some impacts of TOC implementation nMcDonagh Furniture Ltd n nRevenue: $8,000,000 nNumber of employees: 100 nImplementation Date: 2000 nTOC Applications: DBR 13 Some impacts of TOC implementation nIMPLEMENTATION RESULTS nRevenue Increase: 28% Yr 1; 17% Yr 2 nOn-time performance: From 70% - To 98% nLead times decrease: 20 % nNet profit increase: over 300% 14 Some impacts of TOC implementation nSome other companies using TOC applications: nBOEING nMOTOROLA nGENERAL MOTORS nLOCKHEAD MARTIN (F 22) nBAE SYSTEMS n……… 15 TOC Which is harder to manage? Left or Right? B A 16 TOC nIt is based on system approach nA company (enterprise) is to be understood as a chain of dependent processes – this picture below is very, very simplified Marketing Orders Purchase Production Packaging Shipment 56744,1137956849,1 See next slide 17 Larger Process Input Output Input Process Output Input Process Output Input Process Output Process Theory – more complex than one way chain Input Process Output 18 RM FG Aircraft assembly is more of an “A” Plant RM RM RM RM RM RM RM RM RM FG Linear or “I” system Raw Material Finished Goods Process Theory – more complex than one way chain military-aircraft 19 TOC – system approach nOrganizations / Systems exist for a purpose nThat purpose is better achieved by cooperation of multiple, independent elements linked together nEach Inter-linked event depends in some detail upon the other links. nThe system owner determines purpose n n 20 TOC nMost real systems could be seen in such a way, that there are only a few or better only one element (factor), which is the key point, where and only there all possible managerial methods have to be focused in order to control whole system n„Every system is based on inherent simplicity”. nThis element in TOC is called Constraint of the system = bottleneck n nBottleneck: Any resource whose capacity is equal to or less than the demand placed upon it. n Inherent : základní, podstatná. neodmyslitelná…. 21 bottleneck 22 TOC- bottleneck I nDifferent link capabilities, normal variation n and changing workload make it impossible to balance everything. nOne element of the system is more limited than another. n Yosemite-Overcrowding-Bottleneck7jul07 23 TOC- bottleneck II n When the whole system is dependent upon the cooperation of all elements, the weakest link determines the strength of the chain. nAn exactly balanced chain (system) is stronger than a non-homogeneous chain, but when close to the breaking point, all links must be managed n n 24 TOC nWhy constraint ? nConstraint prevents to reach the goal (make money now and in the future) n nThe TOC goal : „Make money now and in the future“ n nEvery system has at least one such a constraint. n The system without such a bottlenecks would reach the predefined business plans in infinite volumes. 25 TOC : nTraditional approach – world of where the aim of any endeavour is to optimize locally every segment of the chain, meaning balancing the capacity of every element and not the flow through the chain n Marketing Orders Purchase Production Packaging Shipment Maximization of the efforts 242 of the costs 26 TOC : nUse of : „common sense“ nThe consistent focus of the bottleneck- – global optimization Zobrazit obrázek v plné velikosti of the throughput Maximization of the efforts Marketing Orders Purchase Production Packaging Shipment 27 TOC 20146 28 TOC nWorld of costs: nmain metric – the weight of the chain (every decrease of the weight of any components will result in better efficiency (performance) nTotal improvement = sum of local improvements nWorld of throughput: nmain metric –the compactness of the chain nOnly improvement of bottleneck will improve performance of the whole chain nTotal improvement = improvement of the bottleneck 29 Life show nhttp://www.tocca.com.au/ n 42-15557322 30 TOC nFive steps process: n Step 0. Identify the Goal of the System/Organization Step 0.5 Establish a way to measure progress to Goal n nStep 1. Identify the system’s constraint. nStep 2. Exploit the system’s constraint. nStep 3. Subordinate everything else to the above decision. nStep 4. Elevate the system’s constraint. nStep 5. If a constraint is broken (that is, relieved or improved), go back to Step 1. But don’t allow inertia to become a constraint. n 31 TOC n„Cost Accounting is enemy number one of productivity“. * nImpact on the behaviour of the people and they habits of finding and improvements of local elements having reason in optimising of these particles. nNew metrics were introduced – already presented n n* Eric Noreen, Debra Smith and James t. Mackey 32 Definition (TOC metric) - summary nThroughput: The rate at which the system generates money through sales. nNote that the money is generated through sales and not production because if you produce something and don’t sell it, you have not really had throughput. (You’ve just put it into inventory). nInventory: All the money that the system has invested in purchasing things which it intends to sell. nOperational Expense: All the money the system spends in order to turn inventory into throughput. n 33 TOC metrics more in detail (T) nthroughput is the rate at which a system achieves its goal. Often this is monetary revenue and is in contrast to output, which is inventory that may be sold or stored in a warehouse. In this case throughput is measured by revenue received (or not) at the point of sale—exactly the right 34 TOC metrics more in detail (OE) nOperating expenses includes e.g. : naccounting expenses nlicense fees nmaintenance and repairs, such as snow removal, trash removal, janitorial service, pest control, and lawn care nadvertising noffice expenses nsupplies nattorney fees and legal fees nutilities, such as telephone n 35 Measuring the goal (TOC metric) nNet profit (NP=T-OE) : ( T, I and OE will be explained later in this course) -> T=Net Sales – TVC =S-TVC nCash nReturn on Investment (ROI=NP/I) nFor a manufacturing enterprise, the goal can also be measured by: n nThroughput =T nInventory = Investment =I nOperating Expenses =OE n n 36 Metrics and their relationships File:ThroughputStructure.jpg 37 TOC –required trends 38 T,I,OE,NP and ROI example nNP=T-OE = (S-TVC) – OE ; where TVC=Total Variable Costs nROI=(T-OE)/I=NP/I, where NP=Net Profit nwhere T=total throughput 10 13 7 9 11 A B C D E 1.Only one product 2.Unit Price (Selling price) = 100 USD 3.Raw material /one product =35 USD =OE 4.T/product=100-35=65 (S-TVC) 5.176 hours/month (constraint of the company) 6.T=176 * 7 = 1232 parts/month 7.Monthly T =1232 * 65 USD = 8 080 USD CCR=Capacity Constraint Resource= =weakest link of the chain= bottleneck 39 T,I,OE,NP and ROI example n1st suggestion is to optimize B from 13->14 parts per hour nT will not increase ->You cannot produce more than 7 !!!! nInvestment to optimize B=5000 USD with depreciation 10 % nOE(month) =(5000 USD * 0,1)/12= 41,67 -> 42 USD 10 13 7 9 11 A B C D E CCR=Capacity Constraint Resource= =weakest link 40 T,I,OE,NP and ROI example nT = throughput will not increase nNP (Net Profit) will decrease based on increased OE (41,67 USD /month) nBased on NP decrease ROI is negative nBad suggestion !!!!!! n 10 13 7 9 11 A B C D E CCR=Capacity Constraint Resource= =weakest link 41 T,I,OE,NP and ROI example n2nd suggestion is to optimize C from 7->7,1 parts/hour npart of the 2nd suggestion is an extra load of E so it goes from 11->10 nNecessary investment is 5000 USD (remains the same) nIncrease of the production/month = 0,1*176=17,6 parts nIncrease of the company T= 17,6*65 USD= 1 144 USD n n 10 13 7->7,1 9 11->10 A B C D E 42 T,I,OE,NP and ROI example nNecessary investment is 5000 USD = I =Inventory= Investment nIncrease of the production/month = 0,1*176=17,6 parts nIncrease of the company T= 17,6*65 USD= 1 144 USD nOE/month =(5000 * 0,1)/12= 41,67 -> 42 USD nOE will be increased by 41,67 USD/month nAnnual increase of the NP = (T-OE)*12=(1144-42)*12 =13 244 USD nROI=NP/I = 13 244/5000 = 265 % !!! nT does not measure local efficiencies, except at the constraint n 10 13 7->7,1 9 11->10 A B C D E 43 Implementation of TOC is complicated switchover process nit represents challenging adventure, where the invested efforts are often not predictable nit requires cooperation, coordination and use of well informed and trained teams on both sides. nyou will certainly overcame natural resistance against changes and persuade distressed and indolent people nno one is willing to change anything n laziness 44 Implementation of TOC is complicated switchover process ntry to find somebody who could accept changes nyou must persuade these guys, that the suggesting changes are in fact their idea and without their creativity TOC would be only toothless beast. nbut how to achieve it ?? QuestionMark 45 Implementation of TOC is complicated switchover process n nSocratic teaching – proving the logic by use of dialog nBuy-in approach – initiator of the changes must have interpersonal and communication talents in order to persuade the targets and squeeze from the people their best ideas. 46 Socratic teaching 47 Implementation of TOC is complicated switchover process n nWe have to find out the answers to these questions: n1. What to change? n2. To what to change to ? n3. How to make the change happen? 48 Implementation of TOC is complicated switchover process nWhat to change? nObjectives : Situation assessment, description of “current reality,” and identification of the core problem or conflict and assumptions that sustain it. Diagnosis, systemic root cause analysis. n n nLayers of resistance: Lack of agreement on the problem n 49 RESISTANCE 50 Implementation of TOC is complicated switchover process nTo what to change? nObjectives : Verbalization of vision/solution, description of strategy to attain the desired state, and avoidance of undesirable side effects. Prescription, decision-making, and solution development. n n nLayers of resistance: n Lack of agreement on a possible direction for a solution n Lack of agreement that the solution will truly address the problem nConcern that the solution will lead to new undesirable side effects (“Yes, but…”) n n 51 Thinking Process Tools noffer the answers to three TOC questions about changes nhelp to clear away every layers of resistance nvisualisation of the thinking process nverbalization of the thinking process nuse of casual logic (cause ->effect) nuse of sufficiency logic - „IF - AND - THEN“ nuse of necessity logic - „IN ORDER TO - THEN - BECAUSE“ brain Basics 52 Cause A Effect B Battery is empty The engine do not start Assumption The engine do not start because battery is flat (empty) I drink a lot of bier My belly looks like Zeppelin The bier is an energy drink My belly looks like Zeppelin The girls like slim athletes I cannot find a girl !!!! 53 Thinking Process Tools I am eating truffles every day I will survive in order to survive i must eat truffles Necessity logic IN ORDER TO - THEN - BECAUSE BlackTruffles3 big-muscles 54 Thinking Process Tools I have one good bulb in my castle hall The chandelier is connected to the electric network Switch is on I have in my room a lot of light AND Sufficiency logic IF - AND - THEN hall 33_10_11---Lights_web old_switch_gear 6860536_6e0ef57349 55 We have to solve the crucial question: what is a core problem (what should be changed) nA tool for solving such a task : Current Reality Tree ØWhy to change something and what is something (core problem=constraint, bottleneck) ØSummary of all undesirable effects (UDE) and their layout based on casual logic - sufficiency logic ØCore Problem – common cause of all UDE Ø Ø n UDE examples nFrom the book “It’s Not Luck“, some examples of the UDEs are: nProduction and distribution do not improve fast/significantly enough nEngineering is unable to deliver new products fast and reliably enough. nCompanies don’t come up with sufficient innovative ideas in marketing. nIn more and more cases the price the market is willing to pay doesn’t leave enough margin. nThere is unprecedented pressure to take actions that will increase sales nCompetition is fiercer than ever. nIn advanced material industries there is a need to launch new products at an unprecedented rate. nIn advanced material industries the constant introduction of new products confuses and spoils the market. nSales people are overloaded. nThere is increasing pressure to reduce prices. n 56 57 UDE 1 UDE 3 UDE 2 UDE 9 UDE 4 UDE 7 Cause 1 UDE 6 UDE 8 Root problem Cause 2 UDE 5 Current Reality Three We have to solve the crucial question: what is a core problem (what should be changed) 58 I touch a hot cook stove I will burn my hand I touch a hot cook stove I will not burn my hand I will use “pot holder“ Causality: IF a lot of snow AND snowboarding in restricted area THEN avalanche AND We have to solve the crucial question: what is a core problem (what should be changed) 59 We have to solve the crucial question: what is a core problem (what should be changed) IN ORDER to avoid to be singed I may not touch a hot cook stove BECAUSE IF I will touch the hot cook I will be singed (wounded) Necessity logic: IN ORDER to avoid something I HAVE TO do this 60 I cannot manage my time I am surfing on internet to much I am very busy (no time) I visit often fast food No sporting Oversupply of calories I am obese (overweight) No time for rendezvous No girl I am alone I am very shy because of my figure I am very shy to negotiate dating No rendezvous I am killing anxiety having reason in solitude by eating and drinking liquors Current Reality Three 61 Current reality three nList of UDE´s : nUDE1 : lack of financial consultants (FC) nUDE2 : late hand-over of required services during implementation and support nUDE3 : a modern design of ERP is not easily understood by rigid customer´s accountants nUDE4 : the customer´s accountants tend to use old fashioned methods and processes which are difficult to manage by using a modern ERP nUDE5 : rigid remuneration does not allow to pay more FC than the others nUDE6 : high level of fluctuation and job-hopping nUDE7 : overburdened FC as a consequence of bad multitasking (will be explained later in Critical Chain PWP) nUDE8 : FC are fed up by permanent repetitive explanation to the customer´s accountants who do no want to understand nUDE9 : bad multitasking nUDE10 : FC are unhappy because of a salary, which is much more lower then their expectations nUDE11 : The management sticks to Cost world and tends to decrease costs by minimising payroll and having all resources as a CCR (Critical Constraint Resources) nUDE12 : Customer is unhappy 62 Current reality three n 11 5 10 6 1 3 9 7 4 8 2 12 ROOT PROBLEM Customer is unhappy 63 nEvaporating Cloud Tree Øthe change without any compromise - basic and starting impulse for the change Øuse of „necessity logic“ – common goal, necessary condition to reach this goals, what have to be done and where is a conflict Ø„well thought out from the scratch“ of the problem, disclosure (findings)and verbal definition of hidden assumptions ØWin-win solution of the whole conflict = injection !!! n We have to solve another crucial question: the direction of solving a core problem (what is the main reason (injection) supporting the change) 64 Necessary condition C to get A Goal A (negation of the root problem) Necessary condition B to get A Activity D Activity D´ Conflict Evaporating Cloud Tree ( a conflict tree, a conflict resolution diagram) We have to solve another crucial question: the direction of solving a core problem Requirement Requirement Prerequisite Prerequisite Objective 65 How to read this Evaporation tree In order to have objective A, we must have requirement B.. In order to have requirement B, we must have prerequisite D... In order to have objective A, we must have requirement C... In order to have requirement C, we must have prerequisite D'... But prerequisites D and D' are in conflict... Like fire and water 66 Evaporation cloud tree- example 1 Performance Management 67 Evaporation cloud tree- example 2 Implementation of TOC 68 Evaporation cloud tree- example 3 Sales and prices 69 Transition Evaporation Cloud Tree Future Reality Tree (FRT) Common objective Evaporation Cloud Tree Conflict idea idea FRT 70 Future Reality Tree (FRT) nThe FRT is similar to the CRT in structure, but with new proposed actions, policies, and behaviour injected into it in order to create a new vision of the future reality of the system. nThe power of the logical "if-then" construction is that if any one of the lower-level causes are removed or mitigated, everything that is above it is subject to change. nIf any one of the three „IFs“ are removed or modified, the „THEN“ may be removed from consideration as a problem n I have fuel I have ignition I have oxygen I have a fire I have fuel I have ignition I do not have oxygen in contact with fuel I do not have a fire CRT FRT INJECTION 71 Future Reality Tree (FRT) nThe objective of the FRT is to communicate a vision of how to change the undesirable effects found in the CRT to desirable effects. n n n DE DE DE DE Injection Injection DE DE DE Injection DE- Desirable effect 72 Future Reality Tree (FRT) NEW ERP IMPLEMENTATION Reliable system Data OK ATP,CTP Finite Capacity Planning Improved logistics Cost decrease Higher efficiency of resources Delivery due date performance improved Purchase planning Stock related costs decreased Better liquidity More flexible reaction to requirements Competitive price Sales increase Market share increase Stock value decreased Business-Production OK 73 nNegative Branch Reservations (NBR): Øuse of sufficiency logic – by taking into consideration objections of other involved persons Øthese objections were related to possible undesirable impacts of the injection implementation ØNBR is often a part of the FRT ØEvaporation Cloud Tree, FRT and NBR enable to answer the second question : To What To change ? n YES, this could be managed BUT…… 74 We will implement new remuneration rules in order to pay better FC Other consultants will not understand the logic and the cause of these new rules (UDE) These rules might be mistakenly interpreted The result could be worse that the current situation FC will be partly satisfied others will be angry FC fluctuation will stop (DE) Negative Branch Reservations YES, this could be managed BUT…… FC= financial consultants UDE=undesirable effect 75 We cannot implement it, because….. n(Prerequisite Tree): Øuse of necessity logic – identification of obstacles Øuse of the human ability to invent any reason n WHY IT IS NOT FEASIBLE Øsetup of the necessary intermediate objectives Øsetup of the schedule for change process 76 We cannot implement it, because….. n(Prerequisite Tree): nThe pre-requisite tree ought to be considered the most important tree in the Thinking Process suite. nIt is the tree that allows us to overcome the obstacles that stop us from implementing our plan. nIt is also the tree that in fact becomes the implementation plan. And it is the tree to which timelines, responsibilities, and accountabilities can be assigned to. n nThere is an English saying that you can plan to fail or you can fail to plan. The pre-requisite tree occupies the position of “plan” amongst the Thinking Process tools. 77 Prerequisite tree - construction So our first step will look like this Objective Obstacle Action Better reports Not SW tool Buy it Improve liquidity High Saftey stock Optimizitation Smart organization Not Workflow tool Buy it 78 after obstacles were overcome 79 Prerequisite tree - example nTea Mission (we want to have a nice cup of tea in the wilderness) nObs-1 : We do not have material to burn Obs-2 : Collection of such material is not allowed in the wilderness. Obs-3 : There could be a strong wind Obs-4 : We do not have matches Obs-5 : We do not have cups Obs-6 : We don’t have a container to boil the water nIO-1 : We have some pieces of wood in the trunk of the car. IO-3 : We have a sheltered place to light the fire IO-4.1 : We have a packing list for the tea activity IO-4.2 : The tea kit is loaded into the car IO= intermediate (partial) objective Obs= obstacle 80 Prerequisite tree - example 81 We cannot implement it, because….. n (Transition Tree): Ødetailed schedule of change implementation process Øwhat actions have to be taken in order to reach intermediate objectives using sufficiency logic (IF-THEN-ELSE) Ø n n n 82 We cannot implement it, because…..HOME study ONLY !!!! n (Transition Tree) http://www.thedecalogue.com/Tools/trt/TREE.html: n n n n 83 We cannot implement it, because….. I do not know in details costs assignment by departments Action Need Reason 84 NBR- OBJ UDE UDE UDE UDE UDE UDE Příčina UDE UDE CP Příčina UDE DE DE DE DE Injekce Injekce DE DE DE Injection Injekce Opposite UDE (DE) UDE (DE) Injekce Top Objective=injection IO 3 IO 4 IO 2 IO 7 OB 3 OB 1 OB 5 OB 2 IO 6 IO 5 OB 4 NEED REASON IO 2 IO 1 NEED REASON ACTION ACTION Starter CRT Evaporating cloud tree FRT Prerequisite tree TT Thinking Process Tools Relationships Injection 85 Additional metrics of TOC (appendix 1) nInventory dollar days (IDD) nA measure of the effectiveness of a supply chain – i.e., did it do things that it shouldn’t have done and as a result is the supply chain holding inventory of products the customer doesn’t want? IDD accounts for two things: 1. the time from when a unit is placed in stock until it is actually needed by a customer; and, 2. the monetary value of the inventory being held. IDD is calculated by multiplying the monetary value of each inventory unit on hand by the number of days since that inventory entered the responsibility of that link. The system should strive for the minimum IDDs necessary to reliability maintain zero throughput dollar days. nNOTE: The resulting unit of measure is "dollar-days". It is neither monetary nor time based. Attempts to compare dollar-days to other monetary measures are invalid. IDDs can be compared only to other IDD levels. 86 Additional metrics of TOC (appendix 2) n Throughput dollar days (TDD) nA measure of the reliability of a supply chain. TDD considers two things: 1. the monetary value of the things a link is committed to deliver but does not; and, 2. the number of days by which the link misses its commitment to deliver. TDD is the summation of the commitments not delivered on time during the chosen time period. The TDD value of individual missed commitments is calculated by multiplying the dollar value of the end product times the number of days the commitment is/was overdue. The system should strive for zero throughput dollar-days. nNOTE: The unit of measure "dollar-days" is neither monetary nor time based. Attempts to compare dollar-days to other monetary measures are invalid. TDD levels can be compared only to other TDD levels. 87 Literature nGoldratt, E., M.: nThe Goal nThe Race nThe Critical Chain nNecessary But Not Sufficient nThe Haystack Syndrome nIt is Not Luck 88 Internet nwww.goldratt.cz nwww.goldratt.com nwww.toc-goldratt.com nwww.focusedperformance.com nwww.tocc.com nwww.tocca.com.au nhttp://www.dbrmfg.co.nz/ - A guide to implement the Theory of constraints nwww.ciras.iastate.ecu/toc/ nhttp://www.ciras.iastate.edu/library/toc/measurements.asp n n……...