Goldratt’s Goal of the Firm

The goal of a firm is to make money.

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Goldratt’s Theory of Constraints (TOC)

Identify the system constraints.

Decide how to exploit the system constraints.

Subordinate everything else to that decision.

Elevate the system constraints.

If, in the previous steps, the constraints have been broken, go back to step 1, but do not let inertia become the system constraint.

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Performance Measurement – Financial

Net profit

An absolute measurement in dollars

Return on investment

A relative measure based on investment

Cash flow

A survival measurement

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Performance Measurement – Operational

Throughput

The rate at which money is generated by the system through sales

Inventory

All the money that the system has invested in purchasing things it intends to sell

Operating expenses

All the money that the system spends to turn inventory into throughput

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Productivity

Productivity typically measured in terms of output per labor hour.

Does not guarantee profitability.

Has throughput increased?

Has inventory decreased?

Have operational expenses decreased?

Productivity is all the actions that bring a company closer to its goals.

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Bottlenecks and Capacity-Constrained Resources

Capacity: the available time for production

Bottleneck: what happens if capacity is less than demand placed on resource

Nonbottleneck: what happens when capacity is greater than demand placed on resource

Capacity-constrained resource (CCR): a resource where the capacity is close to demand on the resource

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Time Components

Setup time: the time that a part spends waiting for a resource to be set up to work on this same part

Process time: the time that the part is being processed

Queue time: the time that a part waits for a resource while the resource is busy with something else

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Time Components of Production Cycle (continued)

Wait time – the time that a part waits not for a resource but for another part so that they can be assembled together

Idle time – the unused time that represents the cycle time less the sum of the setup time, processing time, queue time, and wait time

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Finding the Bottleneck

Run a capacity resource profile

Obtained by looking at the loads placed on each resource by the products that are scheduled through them

Use your knowledge of the particular plant

Look at the system in operation

Talk with supervisors and workers

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Saving Time

Bottlenecks govern both throughput and inventory in the system.

An hour lost at a bottleneck is an hour lost for the entire system.

An hour saved at a nonbottleneck is a mirage.

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Batch Sizes

What is the batch size?

One?

Infinity?

Larger batch sizes require fewer setups and therefore leave more time for processing.

Desirable for bottleneck resources.

For nonbottleneck resources, smaller batch sizes are desirable.

Reduces WIP inventory.

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How to Treat Inventory

Traditional view is the only negative impact of inventory is carrying cost.

However, can also lengthen lead times and create problems with engineering changes.

Less WIP reduces the number of engineering changes.

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JIT Drawbacks

JIT is limited to repetitive manufacturing.

JIT requires a stable production level.

JIT does not allow very much flexibility in the products produced.

JIT still requires work-in-process when used with Kanban so that there is “something to pull.”

Vendors need to be located nearby because the system depends on smaller, more frequent deliveries.

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Benefits from Dollar Day Measurement

Marketing

Discourages holding large amounts of finished goods inventory

Discourages placing large purchase orders that, on the surface, appear to take advantage of quantity discounts

Manufacturing

Discourage large work-in-process and producing earlier than needed

Project management

Quantify a project’s limited resource investment as a function of time

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Relationship with Other Functional Areas

Accounting’s influence

Global measurements show net profits, ROI, and cash flow.

Local cost accounting measurements show efficiency or utilization rates.

Marketing and production

Marketing and production should work in harmony.

In practice, they act independently.

Data for evaluating marketing and manufacturing are different.

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Goldratt’s Rules of Production Scheduling

Do not balance capacity, balance the flow.

The level utilization of a non-bottleneck resource is not determined by its own potential but by some other constraint in the system.

Utilization and activation of a resource are not the same.

An hour lost at a bottleneck is an hour lost for the entire system.

An hour saved at a non-bottleneck is a mirage.

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Goldratt’s Rules of Production Scheduling (continued)

Bottlenecks govern both throughput and inventory in the system.

Transfer batch may not, and many times should not, be equal to the process batch.

A process batch should be variable both along its route and in time.

Priorities can be set only by examining the system’s constraints, and lead time is a derivative of the schedule.

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Drum, Buffer, Rope

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