THEORY OF CONSTRAINTS

AND SYNCHRONOUS
MANUFACTURING

Sessions 13, 14 & 15

 Introduction

• The Theory of Constraints (TOC) was developed

by Dr. Eli Goldratt to aid manufacturers schedule
their production better and make better use of
their resources and inventories.
• The “Five Focusing Steps of TOC” are
condensed below:
• Identify the system constraint. (no improvement
is possible unless the constraint or the weakest
link is found)
• Decide how to exploit the system constraint.
(Make the system as effective as possible).
• Subordinate everything else to that decision.
(Align every other part of the system to support
the constraint even if this reduces the
efficiency of the non-constraint resources).
• Elevate the system constraints. (If output is still
inadequate, acquire more of this resource so it
is no longer a constraint).
• If in the previous steps, the constraints have
been broken, go back to step1; do not let
inertia become the system constraint.
 Production Scheduling Rules
• His rules for production scheduling are listed as
under:
• Do not balance the capacity – balance the flow.
• The level of utilization of a non-bottleneck
resource is determined not 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.
• An hour saved at a non-bottleneck is a mirage.
• Bottlenecks govern both throughput and
inventory in the system.
• The 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. Lead time is a
derivative of the schedule.
• The above principles underlie the concept
of synchronous manufacturing, which
refers to the entire production process
working in harmony to achieve the profit
goal of the firm.
• According to Goldratt:
• “The goal of a firm is to make money”
 Performance Measurements

• To adequately measure a firm’s performance,

two sets of measurement s should be used –
• Financial & Operational.

• The financial measures are:

• Net Profit – an absolute measurement in dollars
• Return on Investment – a relative measure
based on investment
• Cash flow – a survival measurement.
 Operational metrics
• While financial measurements work well at the
higher level, they cannot be used at the
operational level.

• So here we have:
• 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.
 Throughput
• Throughput as specifically defined as
goods sold.
• An inventory of finished goods is not
throughput but inventory. Actual sales
must occur.
• This definition prevents the system from
continuing to produce under the illusion
that goods might be sold. Such action
simply increases cost, builds inventory and
consumes cash.
 Inventory
• Inventory that is carried is (in any form –
WIP or finished goods) is valued only at
the cost of the materials it contains. Labor
costs and machine hours are ignored.
• Using just raw materials cost also avoids
the problem of determining which costs
are direct and which are indirect and their
allocation.
 Operating Expenses
• Operating expenses include production
costs (such as direct labor, indirect labor,
inventory carrying costs, equipment
depreciation and materials and supplies
used in production) and administrative
costs.
• The key difference is that there is no need
to separate direct and indirect costs.
• From the operational standpoint, the goal
of a firm is to

• “INCREASE THROUGHPUT WHILE

SIMULTANEOUSLY REDUCING
INVENTORY AND OPERATING
EXPENSES.
 Productivity

• Typically, productivity is measured in

terms of output per labor hour. However,
this does not ensure that the firm will make
money. The questions to be asked are:
• “Has the action increased throughput?”
• “Has it decreased inventory?”
• “Has it decreased operational expense?”
• This leads us to a new definition:

• “Productivity is all the actions that bring a

company closer to its goals”
 Capacity
• Typically, manufacturing tries to balance
capacities across a sequence of processes in an
attempt to match capacity with market demand.
• In synchronous manufacturing thinking, however,
making all capacities the same is viewed as a bad
decision.
• Such a balance would be possible only if the
output times of all stations were constant or had a
very narrow distribution.
• A normal variation in output times causes
downstream stations to have idle time when the
upstream stations take longer to process.
Conversely, when upstream stations process in a
shorter time, inventory builds up between stations.
The effect of the statistical variation is cumulative.
• The only way this variation can be smoothed is
by increasing wip to absorb the variation (a bad
choice since we are trying to reduce wip) or
increasing capacities downstream to be able to
make up for the longer upstream times.
• The rule here is that capacities within the
process sequence should not be balanced to the
same levels. Rather attempts should be made to
balance the flow of product through the system.
• When flow is balanced capacities are likely to be
unbalanced.
 Dependent Events & Statistical
Fluctuations
• If a process flows from A to B to C to D, and each
process must be completed before passing on to
the next step, then B, C, and D are dependent
events.
• The ability to start the next process is dependent
on the preceding one.
• Statistical fluctuation refers to the normal variation
about a mean or average.
• When statistical fluctuations occur in a dependent
sequence without any inventory between
workstations, there is no opportunity to achieve
average output.
• When one process takes longer than the
average, the next process cannot make up the
time.
• Recall the two stage process simulation that we
did with a batch of six and an individual process
time of 10 minutes average and various
standard deviations.
• In an eight hour shift the average output of the
process was less than the 48 predicted by
averages.
• It is such statistical variations that TOC tries to
address by aiming at balanced flow through the
system rather than balanced capacities.
 Bottlenecks & Capacity
Constrained Resources
• A bottleneck is defined as any resource whose
capacity is less than the demand placed upon it. A
bottleneck is a constraint within the system that
limits output. It is that point in the manufacturing
process where flow thins to a narrow stream. A
bottleneck can be a machine, scarce or highly
skilled labor or a specialized tool.
• A non-bottleneck, on the other hand, is any
resource whose capacity is greater than the
demand placed on it.
• A non-bottleneck, therefore, should not be
working constantly because it can produce more
than is needed. A non-bottleneck contains idle
time.
Capacity-constrained Resource
• A capacity-constrained resource (ccr) is one
whose utilization is close to capacity and could
be a bottleneck if not scheduled properly.
• For example, a ccr may be receiving work in a
job-shop environment from several sources.
• If these sources schedule their flow in a way that
causes idle time for the ccr in excess of its
unused capacity time, then the ccr becomes a
bottleneck when the surge of work arrives at a
later time.
• This can happen if batch sizes are changed or if
one of the upstream operations is not working
for some reason and does not feed enough work
to the ccr.
 Time Components
• The following kinds of time make up production cycle
time:
• Set up time – the time that a part spends waiting for a
resource to be set up to work on this same part.
• Processing 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
• Wait time – the time that the part waits not for a
resource but for another part so that they can be
assembled together.
• Idle time – the unused time; that is the cycle time less
the sum of setup time, processing time, queue time,
and wait time.
• Often, schedulers are tempted to save setup
times – usually by increasing batch size.
• Suppose the batch size is doubled:
• 1. Setup time will be saved by half – but
• 2. All of the other times – processing, queue and
wait times – will double.
• 3. The net result is that the work-in-process is
approximately doubled, as is the investment in
inventory.
• The crucial step is to identify the
bottleneck and add resources there to
increase its capacity.
• An hour saved at the bottleneck adds an
extra hour to the entire production system.
• An hour saved at a non-bottleneck is a
mirage and only adds an hour to its idle
time.
 Drum, Buffer, Rope
• In any system, the bottleneck is the best place to
control the flow of product through the system.
This control point is called the drum because it
strikes the beat that the rest of the system uses
to function.

• By definition, a bottleneck is working all the time

and one reason to use it as the control point is to
make sure that the upstream operations do not
overproduce and build up excess wip that the
bottleneck cannot handle.
• If there is no bottleneck, the next best place to
set the drum is would be a ccr.
 The Bottleneck
• Dealing with the bottleneck is the most critical
and the focus will be to ensure that the
bottleneck always has work to do.
• Consider the simple linear flow from A to G.
• Let D be the bottleneck.
• This means that the capacities are greater
upstream and downstream to it.
• There would be little finished goods inventory
because by the definition of the term bottleneck,
all products produced would be taken by the
market.
 Bottleneck (drum)

A B C D E F G

Market

Inventory Buffer

Communication
(rope)
• There are two things we must do with this
bottleneck:
• Keep a buffer inventory in front of it to ensure
that it always has something to work on. Since
it is a bottleneck, its output determines the
throughput of the system.
• Communicate back upstream to A what D has
produced so that A provides only that amount.
This keeps inventory from building up. This
communication is called the rope.
 Buffer Size
• How large should the buffer be?
• Theoretically, the size of the buffer can be
computed statistically by examining past
performance data or the sequence can be
simulated.
• However, precision is not critical.
• We could start with an estimate and observe the
buffer. If it runs out after some time, it means we
need more buffer while if it builds up or remains
high, we could reduce it to a more manageable
level.
• If the market cannot take all that the process
produces, we create a finished goods inventory
buffer at the end of the line and a time buffer in
front of the bottleneck/ccr.
• The time buffer keeps the bottleneck completely
occupied and the finished goods inventory
protects the market from a stock-out.
• In such a case we will require a rope from the
finished goods inventory to the bottleneck to
prevent over build-up of that inventory.
 How TOC Morphs to Lean
• It will be noticed that the TOC when
extended to all stages in a process
becomes the kanban system.
• JIT is the method devised to keep the
buffer inventory at each workstation at the
minimum.
• Please note that by leveling production
and reducing batch size, each stage starts
behaving like a bottleneck or ccr!
 Batch Sizes

• In an assembly line what is the batch size?

• It is “one” if we concentrate on the number
of parts transferred from one station to the
other or a part focus.
• If the focus is the process then it is infinity
since it is continuing to run the same units.
• In other words, we have a process batch
of infinity and a transfer batch of one.
• In the context of TOC,
• The setup costs relate to the process batch
while
• The carrying costs relate to the transfer
batch.
• Larger batch sizes require fewer setups and can
therefore generate more processing time. And
more output.
• For non-bottleneck processes, smaller process
batches are desirable since they use up existing
idle time thereby reducing wip inventory.
• The transition from a large batch at the
bottleneck to smaller batches for the up
and down stream non-bottleneck stages is
achieved by the transfer batch which is
usually of a smaller size than the process
batch.
 How to Treat Inventory
• Goldratt and Fox propose to treat
inventory as a loan given to the
manufacturing unit.
• The value of the loan is based only on the
materials cost, without any accounting-
type value added from production.
• The loan is measured in terms of dollar
days.
What are dollar days? (or Rupee days)
• It is the product of the total value of inventory
and the number of days it spends within the
department.
• For example an average inventory of $40000
held for 5 days would give a dollar day value of
200,000 dollar days.
• This then becomes one of the performance
measures of the department.
• It would automatically propel the department to
reduce dollar days and thereby reduce wip,
promoting faster flow through the system.
 Comparison of Synchronous
Manufacturing and JIT
• JIT is limited to repetitive manufacturing.
• JIT requires a stable production level (usually
about a month long).
• JIT does not allow very much flexibility in the
products produced. (products must be similar
with a limited number of options)
• JIT still requires wip when used with kanban so
there is something to “pull’. This means that
completed work must be stored on the
downstream side of each workstation to be
pulled by the next station.
• Vendors need to be located nearby because the
system depends on smaller, more frequent
deliveries.
• For continual improvements to the system,
JIT is a trial and error procedure applied to
a real system.
• In synchronous manufacturing, the system
can be programmed and simulated on a
computer because the schedules are
realistic and computer run time is small.
 Illustrative Example
• Given below are the process flows for Products
A, B, and C.
• These products sell for Rs.20 (A), Rs.25 (B) &
Rs.30 (C) respectively.
• Two resources Resource X and Resource Y are
used to produce A, B, & C with the process time
given in minutes as shown on the diagram.
• Raw materials are needed at the process steps
shown, with the cost in Rupees per unit of raw
material. (One unit is used for each product)
• The market will take all that you can produce.
 Rs. 25 Rs. 30
Rs. 20
Selling Price

A B C

X 1 min/part X 4 min/part X 3 min/part

Resource X
RM
Re 5
RM RM
Re 1 Re 2

Y Y Y
2 min/part 3 min/part 5 min/part
Resource Y
RM RM RM
Re 2 Re 5 Re 9
• Which product would you produce to maximize
gross margin/unit?
• If sales personnel are paid on commission,
which product or products would they sell and
how many could they sell?
• Which and how many of the products should
you produce to maximize gross profit for one
week?
• From 3, how much gross profit would there be
for the week?
 Solution
• Maximizing gross margins per unit:
• Product B will be produced

Product Selling RM Gross

Price (Rs) Cost margin (Rs)
(Rs)
A 20 3 17
B 25 7 18
C 30 14 16
 Maximizing sales commission

• Sales personnel would sell the highest

priced product, C (assuming they do not
know the capacity limitations)
• Capacity for C, with Resource Y the
constraint, is 12 parts/hour
• So, for a week at 8 hours a day and 7
days a week, total production would be =
12*8*7 = 672 units.
 To maximize gross profit /week, we need to
compare profits/hour for each product
Product Constraint Production Output/hour Gross margin Gross
Resource time on profit/hour
resource
(min)
A Y 2 30 17 510
B X 4 15 18 270
C Y 5 12 16 192

• If the constraint resource were the same for all

the products, our problem would be solved and
our answer would be to produce as much A as
possible.
• However, X is the constraint for B; so the
optimum could be a combination of A &
B.
• To test this we check the value of Y for
every hour of producing B.
• This value is = (60/3)*18 = Rs.360
• Since this is less than Rs.510 for A, we
produce only A.
• Gross profit for the week is 30*8*7*17 =
Rs.85,680
• What would the decision be if B’s gross
margin were to be Rs.30/unit?