The Theory of Constraints

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The Theory of Constraints

Eli Goldratt, a physicist. OPT: a scheduling package. The Goal and the Theory of Constraints.

TOC provides a way of thinking globally.

Goldratt challenges the conventional approach to managing organizations.

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Traditional Decision Making

The “Cost World” Perspective

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Traditional Decision Making

How are investment decisions usually made? Usually based on cost considerations (right)? “The Cost-World” Perspective

Consider how the cost-world perspective affects the push towards parts per million (PPM) quality and “Zero” inventory.

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The Cost World Perspective: Cost and PPM Quality

ReducingScrap

From To

AnnualCost

Savings

AnnualInvestment

NeededThe CostJudgment

Do It!

Maybe?

Do NOT Do

8% 2%

2% 0.5%

0.5% 0.1%

$60,000$15,000

$4,000

$20,000$20,000

$20,000

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Is 99.5% Quality Good Enough For You?

Doctors in New York State hospitals drop 1,291 babies per year

Chicago O’Hare International Airport has 4,197 unsafe arrivals / departures per year

Post Offices in New York State lose 9,315 pieces of mail per day

No problem. Everything is OK!

If it is, then you won’t mind if:I’ll do better

next time!

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The Cost World Perspective: Cost and Inventory Turns

IncreasingInventory

Turns

AnnualCost

Savings*

AnnualInvestment

NeededThe CostJudgment

3 6 $2M $2M6 12 $1M $2M12 24 $0.5M $2M

* Assuming starting inventory of $15M and 25% carrying cost

Do It

Maybe?

Do NOT Do

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The Real Cost of Inventory

Inventory adversely affects all the factors that give you a competitive edge (namely, Price, Quality, and Delivery). Higher inventory leads to: Longer lead times and poorer delivery performance, Defects not being detected soon enough, Increased costs due to obsolescence, storage costs,

overtime, etc.

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Systems Thinking and the Theory of Constraints

The “Throughput World” Perspective

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The Theory of Constraints (TOC) is based on two premises: The Goal of a business is to make more money, … in

the present and in the future.

A system’s constraint(s) determine its output.

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TOC Performance Measures

Throughput (T): The rate at which the system generates money through sales.

Inventory (I): All the money invested in purchasing things needed by the system to sell its products.

Operating Expenses (OE): All the money the system spends, turning inventory into throughput.

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The Goal: To Make Money

Bottom Line Measurements

NET PROFIT

RETURN ONINVESTMENT

CASH FLOW(Relative)

(Survival)

(Absolute)

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The Five-Step Focusing Process

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The Throughput World: The Five Step Focusing Process of TOC

Step 1: Identify the System’s Constraint(s) Step 2: Decide how to Exploit the

System’s Constraints Step 3: Subordinate Everything Else to

that Decision Step 4: Elevate the System’s Constraints Step 5: If a Constraint Was Broken in

Previous Steps, Go to Step 1

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Types of Constraints

Physical Constraints Physical, tangible; easy to recognize as constraint.

Machine capacity, material availability, space availability, etc.

Market Constraints Demand for company’s products and services is less

than capacity of organization, or not in desired proportion.

Policy Constraints Not physical in nature. Includes entire system of

measures and methods and even mindset that governs the strategic and tactical decisions of the company.

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Policy Constraints

Mindset Constraints A constraint if thought process or culture of the organization

blocks design & implementation of measures & methods required to achieve goals

Measures Constraints A constraint if the measurement system drive behaviors that

are incongruous with organizational goals

Methods Constraints A constraint when procedures and techniques used result in

actions incompatible with goals

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Effect of Performance Measures

“Tell me how you will measure me and I will tell you how I will behave.”

“If you measure me in an illogical way, … do not complain about illogical behavior.”

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Effect of Performance Measures

“If you measure me in an unreasonable way, no one knows how I will behave...”.

“Not even me.”

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Identifying Constraints

Identifying Physical Constraints: A Typical WIP Inventory Profile:

Ave

. WIP

Inv

ento

ry

R1 R2 R3 R4 R5 R6

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How can we get the most from Physical Constraints?

Techniques for getting the most from capacity constraints: Eliminate periods of idle time Reduce setup time and run time per unit Improve quality control Purchase additional capacity

Is there anything else we can do?

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Do We Shut The Plant Down?

Is this a “throughput world” perspective? We dealt with “product profits.” Are there

any product profits in the throughput world?

What is the second focusing step? DECIDE HOW TO EXPLOIT THE

CONSTRAINT.

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Throughput World vs. Cost World

The throughput world perspective indicates that we should first focus on producing product .P

The cost world perspective had indicated that we should first focus on producing product .Q

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Produce P first: 100 / week. Requires minutes of B. Leaves minutes to make Q.

Each Q requires minutes on resource B. Can produce units of Q.

With 100 units of P and units of Q, we get 100 x $45 + x $60 = $ each week.

After subtracting $6,000 for operating expenses, we obtain a net profit of

1500900

30900/30 = 30

3030 6300

$300

Which Perspective Is Correct?

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Cost World or Throughput World?

What product will you focus on?

P

But in the long run,“Yes, there are two paths you can go by, …

There’s still time to change the road you’re on.”

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The 5 Focusing Steps (Contd.) What is Step 4?

Elevate the System’s Constraints How does it affect us here?

The Marketing Director Speaks Up : “Another constraint in our company.”

It is the market

A Great Market in Japan! “Have to discount prices by 20%”

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Maybe We Should Not Sell in Japan? Right now, we can get at least $ per

constraint minute in the domestic market.2

B

Okay, suppose we do not go to Japan Is there something else we can do?

So, should we go to Japan at all?

Let’s buy another machine! Which one?

How soon do we recover investment?

Cost of the machine = $100,000. Cost of operator: $400 per week.

Perhaps not.

What is weekly operating expense now? $6,400

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Welcome to the “Paradise Plant!”

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IF:Clients never change their mind,

Vendors always supply what we ask for, on time,

We do not have any absenteeism,

Our workers are excellently trained,

Our processes are extremely reliable,

Our quality is superb,

Data is readily available and accurate, and

Managing production will be a piece of cake, …

THEN:

You can decide on whatever policies you want.

right?

The Paradise Plant!

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The Simulator provided you with aparadise plant because all external causeswere eliminated.

Nevertheless,

Was it easy to manage production?

The Paradise Plant!

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Rethinking Project Management

The Critical Chain

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Generally a “one-off” type of activity Typically involves completing a set of tasks Tasks typically have long durations that are

also highly variable

Project Management: Characteristics

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Project Management: Problems Usually Faced

Project is not clearly defined “Known Work” + “Known Unknown Work” + “Unknown Work”

Existing project work is not complete before new projects shift priorities leading to multi-tasking

Problems in a project cascade into another project Constant pressure to increase staff for peak loads A lot of uncertainty involved in estimating task durations

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First, consider a simple project with 2 tasks performed by 2 different operators:

Managing Projects Under Uncertainty

Task 1 Task 2

If each task takes 15 days on average, what is average project completion time? 30 days

Assume task durations are uniformly distributed (5,25)

5 25

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What else makes project management complex? Consider a slightly more complex project:

Task 1

Task 2Task 3

As before, each task takes 15 days on average.

36%Probability of completing project in 30 days?

33 days

5 25Assume task durations are uniformly distributed (5,25)

What is the average project completion time?

Managing Projects Under Uncertainty

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The affect of resource interdependencies on a simple project:

Task 1

Task 2

Task 3

Task 4Task 5

If each task takes 15 days on average, what is theprobability that the project finishes in 45 days?

Srini; Here we get about 30%

< 25%

5 25

Managing Projects

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Conclusion: A project’s most likely completion time is much larger than the sum of the averages of the tasks making up it’s longest path (due to synchronization or due to task dependencies)

So, how do we quote estimated completion time of the project? Do people give a number that they know has

a high (50% or more) chance of missing?

Determining Task Durations

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Determining Task and Project Durations – the Traditional Way

So, the average task times are “padded” to accommodate any possible delays. Instead of specifying a 50% time estimate (which fails half the time), a 98% confidence estimate is developed for the tasks and project duration.

The project is now estimated to take 70 days, not 45.

What is the chance the project will complete in 70 days?

Srini 98% of [5,25] = 5+.98*20 = 5+19.6 = 24.6

5 25

Task 1

Task 2

Task 3

Task 4Task 5

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A network is drawn up, representing tasks, and precedence relationships between tasks

The task durations are buffered to accommodate uncertainty surrounding the tasks.

Milestones (due dates) are developed for each task.

The Critical Path is determined.

The padded project duration (with safety buffers) is conveyed to the customer and to supervisors

The project is monitored. So, why is it very unlikely that the project will complete on time?

Project Management - The Traditional Way

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Project Management The TOC Way

The Genesis of the Critical Chain

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Theory of Constraints and the Critical Chain

Eli Goldratt, a physicist. The Goal (1982, 3rd edition published 2004) The Critical Chain (1997)

Goldratt challenges the conventional approach to managing organizations.

TOC tools for Production: Drum-Buffer-Rope Project Management: Critical Chain

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The Critical Chain implementation begins with 3 questions:

What to change?

What to change to?

How to cause the change?

Managing the Critical Chain

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Erroneous assumptions:

It is good to induct work as soon as possible

Protecting task times with buffers will improve on-time performance (this is a biggie)

Multitasking is beneficial

Providing milestones for each task is good

…

What to Change?

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Parkinson’s Law: “Work expands to fill the time available.” People tend to continue working on a task that could have been completed earlier if they are given a pre-specified completion time.

The Continue to Polish syndrome (aka: the 3-Minute Egg Rule): “It’s not quality if it’s finished before time is up.”

The Student Syndrome: When people feel there is plenty of time to complete a task, other things become important and they procrastinate on the task.

What to Change: Behavioral Effects

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Behavioral Effects: The Student Syndrome

Time ElapsedProject

Due Date

Per

cen

t of

Pro

ject

Com

ple

ted

25%

50%

75%

100%

Completion Date

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People do not want to hurt their future negotiating power by finishing too soon.

There is a sense of urgency, promoting a tendency to induct work as soon as possible.

More Behavioral Effects that Increase Task and Project Durations

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Losing Time & Capacity Due to Uncertainties, & by Inducting ASAP: An MRO Example

Resource contention

(Queues )

Lead time

Delays/ Shortages

Backshops

Start Early (CT )

High no. ofjobs in progress

Uncertainties multiply Delays

• Induct Asset ASAP

• Start repairs ASAP

• Start buildup ASAP

Lines

Intrinsic Uncertainties

•Pressure to deliver on time

•Pressure to expedite

• Cascade effect within &

across projects

•M

ulti-

task

ing

•P

riorit

y ch

ange

s•

De-

sync

hron

izat

ion

•Pus

h pa

rts to

Bac

k sh

ops

ASAP

•Pul

l par

ts fr

om B

ack

shop

s ASAP

•Exp

editin

g

•M

ulti-t

askin

g

•De-

sync

hron

izatio

n •E

arly release for

production

Realization Technologies, Inc.

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Summary: Sources of Project Delays

A. Synchronization Delays Integration (assembly) points Resources and tasks

B. Delays due to Behavioral Effects Parkinson’s Law “Student” Syndrome “Continue to Polish” Syndrome

C. Queuing Delays Induct work ahead of schedule Multitasking


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The Affect of Multitasking

3 Tasks, A, B, C, each of duration 6 days, that have to be executed by one resource. How should you schedule these tasks?

A2 B2 C2 A2 B2 C2 A2 B2 C2

A6 B6 C6

Lead Time for Task A?

Lead Time for Task A?

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Project Planning (aka Network Building): A meeting of project stakeholders for clarity on intended objectives and success criteria (how to deliver on the order winners)

Identify resource dependencies

Capture time estimates – and build the right safety net – determine “Aggressive But Possible” times

What to Change to?

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Identify the longest path of dependent events. This is the Critical Chain

Put in place Project Buffer and Feeding Buffers

Avoid displaying milestones (EST, EFT, LST, LFT).

Rather, emphasize the “Relay Runner” work ethic (this is a biggie).

What to Change To?

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What to Change to?

The Rules of the Critical Chain:

1. Do not schedule Project tasks/ resources precisely at planning time.

2. Pipelining: Do not start projects ASAP.

3. Allow explicit buffer time in projects.


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Rationale: Project Buffers are more efficient than safeties within each task

1. Critical Chain Buffering: Aggressive plans without precise resource schedules

• Determine “Aggressive but Possible” times for each activity – remove the padding within each task.

• Determine the critical chain of tasks with these times.

• Provide a project buffer to protect the critical chain.

Traditional Approach:

Critical ChainApproach:


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• Most heavily loaded shared resource (constraint), determines throughput

• Project starts are based on constraint’s capacity,

• Pressure to multitask also comes down

Most heavily loaded

resource

Pipelining

Pipelining is more efficient than starting projects ASAP

2. Pipelining: Release Projects Based on Constraints Instead of Starting ASAP


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3. Buffer Management: Allocate Resources to Tasks Based on “Buffer Burn Rate”


Buffer

50% work completed 60% buffer consumed

Chain 2

Burn Rate: % of buffer consumed vs. % of work completed. Automatically calculated on an ongoing basis to assess how much buffer is still available for future uncertainties.

Task Priorities: Tasks that lie on chains with less safety remaining are given top priority. This ensures that buffers are not wasted, and also reduces pressure to multitask.

Buffer

33% work completed 20% buffer consumed

Chain 1

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Secure agreement on problem to be solved and agreement on direction of solution

Verify that proposed solution will deliver desired results. Ensure that all negative side effects are identified and prevented from happening

Identify all significant potential obstacles that could block implementation of solution

Ensure that necessary leadership is committed to making implementation successful – the RIGHT METRICS

How to Cause the Change?

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MRO Setting: WR-ALC, NavAir – Cherry Point, MCLB – Albany, Israeli Air Force

Software: Lucent, Microsoft, Intel

Production Supply: Boeing, Lockheed Martin, Larsen & Toubro, Tata Iron & Steel

Testing: AFOTEC, AFFTC (C-17, F-15)

Product Development: Seagate, Harris, BAE Systems

The Critical Chain: Does It Work?

Documents

The Theory of Constraints