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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. Traditional Decision Making. - PowerPoint PPT Presentation
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2008, M.
Srinivasan1
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.
2008, M.
Srinivasan2
Traditional Decision Making
The “Cost World” Perspective
2008, M.
Srinivasan3
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.
2008, M.
Srinivasan4
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
2008, M.
Srinivasan5
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!
2008, M.
Srinivasan6
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
2008, M.
Srinivasan7
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.
2008, M.
Srinivasan8
Systems Thinking and the Theory of Constraints
The “Throughput World” Perspective
2008, M.
Srinivasan9
The Theory of Constraints
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.
2008, M.
Srinivasan10
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.
2008, M.
Srinivasan11
The Goal: To Make Money
Bottom Line Measurements
NET PROFIT
RETURN ONINVESTMENT
CASH FLOW(Relative)
(Survival)
(Absolute)
2008, M.
Srinivasan12
The Theory of Constraints
The Five-Step Focusing Process
2008, M.
Srinivasan13
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
2008, M.
Srinivasan14
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.
2008, M.
Srinivasan15
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
2008, M.
Srinivasan16
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.”
2008, M.
Srinivasan17
Effect of Performance Measures
“If you measure me in an unreasonable way, no one knows how I will behave...”.
“Not even me.”
2008, M.
Srinivasan18
Identifying Constraints
Identifying Physical Constraints: A Typical WIP Inventory Profile:
Ave
. WIP
Inv
ento
ry
R1 R2 R3 R4 R5 R6
2008, M.
Srinivasan19
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?
2008, M.
Srinivasan20
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.
2008, M.
Srinivasan21
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
2008, M.
Srinivasan22
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?
2008, M.
Srinivasan23
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.”
2008, M.
Srinivasan24
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%”
2008, M.
Srinivasan25
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
2008, M.
Srinivasan26
Welcome to the “Paradise Plant!”
2008, M.
Srinivasan27
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!
2008, M.
Srinivasan28
The Simulator provided you with aparadise plant because all external causeswere eliminated.
Nevertheless,
Was it easy to manage production?
The Paradise Plant!
2008, M.
Srinivasan29
Rethinking Project Management
The Critical Chain
2008, M.
Srinivasan30
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
2008, M.
Srinivasan31
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
2008, M.
Srinivasan32
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
2008, M.
Srinivasan33
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
2008, M.
Srinivasan34
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
2008, M.
Srinivasan35
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
2008, M.
Srinivasan36
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
2008, M.
Srinivasan37
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
2008, M.
Srinivasan38
Project Management The TOC Way
The Genesis of the Critical Chain
2008, M.
Srinivasan39
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
2008, M.
Srinivasan40
The Critical Chain implementation begins with 3 questions:
What to change?
What to change to?
How to cause the change?
Managing the Critical Chain
2008, M.
Srinivasan41
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?
2008, M.
Srinivasan42
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
2008, M.
Srinivasan43
Behavioral Effects: The Student Syndrome
Time ElapsedProject
Due Date
Per
cen
t of
Pro
ject
Com
ple
ted
25%
50%
75%
100%
Completion Date
2008, M.
Srinivasan44
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
2008, M.
Srinivasan45
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.
2008, M.
Srinivasan46
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
Realization Technologies, Inc.
2008, M.
Srinivasan47
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?
2008, M.
Srinivasan48
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?
2008, M.
Srinivasan49
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?
2008, M.
Srinivasan50
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.
Realization Technologies, Inc.
2008, M.
Srinivasan51
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:
Realization Technologies, Inc.
2008, M.
Srinivasan52
• 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
Realization Technologies, Inc.
2008, M.
Srinivasan53
3. Buffer Management: Allocate Resources to Tasks Based on “Buffer Burn Rate”
Realization Technologies, Inc.
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
2008, M.
Srinivasan54
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?
2008, M.
Srinivasan55
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?