IMPROVEMENT

Theory of constraints

6/25/2010 TOC, presented by Nickolay Shaposhnikov 1

 ‫תורת האילוצים‬

TOC
The Theory of Constraints (TOC) is a Quality
Management System originally introduced by
Dr. Eliyahu M. Goldratt in the book called
The Goal (1984)
Eliyahu Moshe Goldratt
(born March 31, 1948)
is an Israeli physicist
 Bachelor of Science
from Tel Aviv University
 Masters of Science,
and Doctorate of Philosophy
from Bar-Ilan University

 Goldratt founded the Abraham Y. Goldratt Institute in 1996

“the strength of any chain, process, or system is dependent upon its

weakest link”
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 TOC

 Any manageable system is limited in achieving more of its goal by a very

small number of constraints, and that there is always at least one constraint.

 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.

 A constraint is anything that limits a system’s performance,

relative to the system goal

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 CONSTRAINT

Constraints may appear in the form of

 capacity,
 material,
 logistics,
 the market demand,
 time
 behavior,
 or even management policy

TOC thinking regards all progress toward the goal of making money as relating directly
to management attention toward the constraint(s).

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 PERFORMANCE MEASURES

 Throughput is defined as the rate at which the system generates money

through sales, not through production. Goods are not considered an asset
until sold.

 Inventory is defined as the money invested in goods that the firm intends
to sell or material that the firm intends to convert into salable items.

 Operating expense includes all the money the firm spends converting
inventory into throughput.

TOC emphasizes the use of these three global operational measures rather
than local measures (e.g., efficiency and utilization)

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 THE OBJECTIVE OF THE FIRM

Throughput

Inventory

Operating expense

should lead to the accomplishment of the firm's goal:

TO MAKE MONEY NOW AS WELL IN THE FUTURE!

Anything that prevents a firm from reaching this goal is labeled as a

constraint.

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 P&Q Company
Product Market Selling Cost of Direct
Opportunity Price/ Materials/ labor
/Week piece piece /piece
P 100pcs 90$ 45$ 55min
Q 50pcs 100$ 40$ 50min

-includes 2400$ direct labor

 Operating Expenses (OE) = 6000$
-does not include material cost FG
RM for Ps
Ps&Qs
A B C D
2400min/week 2400min/week 2400min/week 2400min/week

• P-15min • P-15min • P-10min

• P-15min
• Q-10min • Q-30min • Q-5min • Q-5min

RM for Qs

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 Trying to satisfy entire demand : produce all Ps
and all Qs
Product Market Selling Cost of Could Yield a total of
Demand Price/ Materials
/Week piece /piece
P 100pcs 90$ 45$ (90-45)*100=4500$
Q 50pcs 100$ 40$ (100-40)x50=3000$
∑=7500$
Profit = 7500- 6000 =
= 1500$/week

 Operating Expenses (OE) = 6000$

Assumption that we did : infinite capacity at any given point in time and
that all resources are equal

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 Not all resources are equal!
It leads to the Five Focusing steps in the Theory of Constraints!

1st Step : Identify the system’s constraints

 Look at the company as if it were a chain
Indentify the weakest link
Why can’t we satisfy the entire demand?
Where is inventory piling up?

What the load on the resources would be if we were able to take all of the market
demand and turn it into Orders?

Resource A B C D
/Product 2400min 2400min 2400min 2400min
/week /week /week /week
100P 1500min 1500min 1500min 1000min
50Q 500min 1500min 250min 250min
∑ 2000min 3000min 1750min 1250min

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 1st Step : Identify the system’s constraints

A B C D

• 2000min • 3000min • 1750min • 1250min

of of of of
2400min 2400min 2400min 2400min
• 84% • 125% • 73% • 52%

There is a physical internal capacity constraint in this company : Resource B.

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 2nd Step : Exploit the system’s constraints
Includes looking for the most profitable product mix, scheduling decisions,
and working rules
! We want to make sure we set B to work at 100% of capacity
on the most profitable product !
Determination of the most profitable product

Product Market Selling Cost of Yield/ Direct labor

Opportunity Price/piece Materials/piece piece /piece
/Week
P 100pcs 90$ 45$ 45$ 55min
Q 50pcs 100$ 40$ 60$ 50min

Qs give us the higher contribution and consumes less direct labor than Ps .
A conventional approach to product cost prioritizing suggests producing as many Qs
as possible and filling up the rest with Ps.

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still 2nd Step
…producing as many Qs
as possible and filling up the rest with Ps

Resource A B C D Yield/week
/Product 2400min 2400min/week 2400min 2400min
Demand /week /week /week
60P of 900min 900min/15min= 900min 600min 60pcsX45*$=2700$
100P 60pcs *Yield/piece=90-45
50Q of 500min 1500min=50pcs 250min 250min 50pcsX60*$=3000$
50Q *Yield/piece=100-40
∑ 1400min 2400min 1150min 850min 5700$
=58% =100% =48% =35%
 Operating Expenses (OE) = 6000$ 5700$-6000$= - 300$
Net Loss of 300$
This calculations ignore the fact that all recourses are not equal.
In the decision making process itself, we are not recognizing constraint B
Go back and try to exploit the constraint

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 Again the 2nd Step : Exploit the system’s
constraints
We want B to squeeze the most dollars out of the system that it can!
B is a limited resource
How much each product is contributing relative to the time they are demanding
on the constraint.

!CAPACITY OF THE CONSTRAINT IS THE CAPACITY OF THE COMPANY!

If product P consumes 15 minutes of resource B’s time and contributes 45$ ->
company is making 3$ per minute producing Ps.
Qs consumes 30min of B’s time for 60$, or 2$ per minute.

PRIORITIES CHANGE! First all Ps then fill up the rest with Qs.

There is a difference between constraints and non-constraints in the impact on

our companies!

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still 2nd Step
…producing as many Ps
as possible and filling up the rest with Qs
Resource A B C D Yield/week
/Product 2400min 2400min/week 2400min 2400min
Demand /week /week /week
100P of 1500min 1500min=100pcs 1500min 1000min 100pcsX45*$=4500$
100P *Yield/piece=90-45
30Q of 300min 900min=30pcs 150min 150min 30pcsX60*$=1800$
50Q *Yield/piece=100-40
∑ 1800 2400min 1650min 1150min 6300$
=75% =100% =69% =48%
 Operating Expenses (OE) = 6000$ 6300$-6000$= 300$

Net Profit of 300$

No physical changes!

Just understanding how to maximize the capabilities we already have.

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 3rd Step: Subordinate everything else to the
decisions made in 2nd Step
Synchronizing the outputs of all other links in the chain to that of the constraint.
Load the B to 100% of its available time every week
RM for FG
100Ps Ps&Qs

A B C D

• 1800min • 2400min • 1650min • 1150min

of of of of
RM for 2400min 2400min 2400min 2400min
30Qs • 75% • 100% • 69% • 48%

Apply Drum-Buffer-Rope (DBR) production planning methodology

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.... 3rd Step

DBR
Designed to regulate the flow of work-in-process (WIP) through
a production line at or near the full capacity of the most restricted resource
in the manufacturing chain.

 The drum is the rate or pace of production set by the system's

constraint.
The rope is communication device that connects the most restricted
resource ( constraint ) to the material release point and ensures that RM
is not inserted into the production process at a rate faster than the constraint can
accommodate it. Purpose of rope is to protect the constraint from being
overloaded with WIP.

To protect the constraint from being “starved” for productive work to do,
a Time Buffer is created to ensure that WIP arrives at the resource
well before it is scheduled to be processed.

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.... 3rd Step

ROPE DBR
RM for
100Ps FG
TIME DRUM
Ps&Qs
BUFFER
A 75% C 69% D 48%
B
100%
RM for
30Qs ROPE

We want A to feed B

We do not want to load A with any more than 100P and 30Q
-> avoid excess inventory
We do not want A giving B less than B needs

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.... 3rd Step ,
SUBORDINATION
Ford used space
THROUGH THE DBR Ohno level of
TOOL TIME BUFFER inventory

Considerable time
buffer ( earlier RM is
released )
-> more orders are
simultaneously the shop
floor, traffic jams,
more management
attention to sort
priorities, queues, high
inventory, poor due-date
performance (<90%)
->wrongly leads to
release more orders!

Source: Standing on the shoulders of giants ,Figure 1, E. Goldratt, 2008

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 4th Step : Elevate the system’s constraint
“To make the weak link stronger .”

Buying another B machine

Paying for overtime
Improving process
Cross-training

In our case, extra 30min /day (≈+5%) of restricted resource B, through
improving process, allowing us to produce 5 more Qs per week and adding
another 300$ to the bottom line - > 100% more profit every week!

5th Step :
If the constraint is broken go back to the 1st step
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 THE FIVE FOCUSING STEPS OF TOC

I. Identify (choose) the system’s constraint.

II. Decide how to exploit the system’s constraint.

III. Subordinate everything else to the above decision.

IV. Elevate the system’s constraint.

V. If the constraint is broken go back to step one

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 THE EVALUATION OF TOC OVER 30 YEARS

Source: http://goldrattschools.org/toc/
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 Industry sectors

• Manufacturing • Aerospace
• Distribution • Automotive
• Projects • Construction
• Financial Services • Education
• Health care • Semiconductors
• Defense • Telecommunications
• Government • etc…

Clients: 3M, Boeing, Intel, Procter & Gamble, United States Air Force….

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 References

1. Eliyahu Goldratt, The Goal: A Process of Ongoing Improvement,

North River Press Publication, 1984
2. Eli Schragenheim and H. William Dettmer, Simplified Drum-Buffer-Rope.
A whole system approach to high velocity manufacturing, 2000
3. Eliyahu Goldratt , Standing on the shoulders of Giants,
Goldratt consulting, 2008
4. Lisa J. Schneinkopf, The Theory of Constraints, CCI, 2002
5. Nadav Cohen, What is TOC. Retrieved May, 2010
from http://goldrattschools.org/toc/

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