1
 Introduction to the Theory of Constraints

J.Skorkovský, PhD.; KPH ESF MU

2
Measuring the goal (TOC metric)
•Net profit (NP=T-OE) :  ( T, I and OE will be explained later in this course) -> T=Net Sales – TVC
=S-TVC
•Cash
•Return on Investment (ROI=NP/I)
•For a manufacturing enterprise, the goal can also be measured by:
•
•Throughput =T
•Inventory = Investment =I
•Operating Expenses =OE
•
•

3
Metrics and their relationships
File:ThroughputStructure.jpg

4
TOC –required trends


5
T,I,OE,NP and ROI example
•NP=T-OE = (S-TVC) - OE
•ROI=(T-OE)/I=NP/I
•where 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 (contraint 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

6
T,I,OE,NP and ROI example
•1st suggestion is to optimize B from 13->14 parts per hour
•T will not  increase ->You cannot produce more than 7 !!!!
•Investment to optimize B=5000 USD with depreciation 10 %
•OE(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

7
T,I,OE,NP and ROI example
•T = throughput will not increase
•NP (Net Profit) will decrease based on increased OE (41,67 USD /month)
•Based on NP decrease ROI is negative
•Bad suggestion  !!!!!!
•
10
13
7
9
11
A
B
C
D
E
CCR=Capacity
Constraint Resource=
=weakest link

8
T,I,OE,NP and ROI example
•2nd suggestion is to optimize C from 7->7,1 parts/hour
•part of the 2nd suggestion is an extra load of E  so it goes from 11->10
•Necessary investment is 5000 USD (remains the same)
•Increase of the production/month = 0,1*176=17,6 parts
•Increase of the company T= 17,6*65 USD= 1 144 USD
•
•
10
13
7->7,1
9
11->10
A
B
C
D
E

9
T,I,OE,NP and ROI example
•Necessary investment is 5000 USD = I =Inventory= Investment
•Increase of the production/month = 0,1*176=17,6 parts
•Increase of the company T= 17,6*65 USD= 1 144 USD
•OE/month =(5000 * 0,1)/12= 41,67 -> 42  USD
•OE will be increased by 41,67 USD/month
•Annual increase of the NP = (T-OE)*12=(1144-42)*12 =13 244 USD
•ROI=NP/I = 13 244/5000 = 265 % !!!
•T does not measure local efficiencies, except at the constraint
•
10
13
7->7,1
9
11->10
A
B
C
D
E