Theory Of Constraints (TOC)

The Goal Eliyahu Goldratt

Theory Of Constraints (TOC) GOAL : To make money now as well as in future

i.e. we can describe a company as

a money-making machine

Telesis

Imagine you enter a shop selling money-making machines

Telesis

Theory Of Constraints (TOC) Questions that jump into our mind:

What is the rate at which the machine generates money? What is the cost of the machine? How much money is captured by the machine? How much money do we spend to operate it?
Telesis

TOC

What is the rate at which the machine generates money? THROUGHPUT : The rate at which the system

generates money through sales

T = Qi (SP VE)i per time unit from the system

i= products
Telesis

TOC

In

Out

90 / day

100 / day

85 / day

105 / day

What will be the systems output?

Telesis

Throughput

Bottleneck - is the maximum utilised equipment (may not necessarily be the slowest process) - is where maximum inventory accumulates - should be the most expensive resource - should preferably be at the beginning of the process flow

Telesis

Products

Selling Price Rs/unit

A B C D E

1,000 (4) 1,120 (2) 950 (5) 1,100 (3) 1,250 (1)

Telesis

Products

Selling Price Rs/unit

Variable Expenses Rs/unit

A B C D E

1,000 (4) 1,120 (2) 950 (5) 1,100 (3) 1,250 (1)

820 900 750 840 1,000

Telesis

Products

Selling Price Rs/unit

Variable Expenses Rs/unit

Cntrbtn Margin Rs/unit

A B C D E

1,000 (4) 1,120 (2) 950 (5) 1,100 (3) 1,250 (1)

820 900 750 840 1,000

180 (5) 220 (3) 200 (4) 260 (1) 250 (2)

Telesis

Products

Selling Price Rs/unit

Variable Expenses Rs/unit

Cntrbtn Margin Rs/unit

Production Rate units/day

A B C D E

1,000 (4) 1,120 (2) 950 (5) 1,100 (3) 1,250 (1)

820 900 750 840 1,000

180 (5) 220 (3) 200 (4) 260 (1) 250 (2)

210 170 200 150 140

Telesis

Products

Selling Price Rs/unit

Variable Expenses Rs/unit

Cntrbtn Margin Rs/unit

Production Rate units/day

Thput Rs/day

A B C D E

1,000 (4) 1,120 (2) 950 (5) 1,100 (3) 1,250 (1)

820 900 750 840 1,000

180 (5) 220 (3) 200 (4) 260 (1) 250 (2)

210 170 200 150 140

37,800 (3) 37,400 (4) 40,000 (1) 39,000 (2) 35,000 (5)

Telesis

TOC

What is the cost of the machine? How much money is captured by the machine?

INVENTORY : All the money the system

invests in purchasing things the system intends to sell

I = Fixed Assets + Inventory
Telesis

TOC

How much money do we spend to operate it? OPERATING EXPENSES : All the money the

system spends in turning inventory into throughput

OE = All expenses not identifiable as variable expenses for any product

Telesis

TOC The GOAL of the firm is to increase THROUGHPUT (T) while simultaneously reducing INVENTORY (I) and reducing OPERATING EXPENSES (OE)
Telesis

TOC

ROI = Profit / Investment Throughput Operating Expenses ROI = ------------------------------------------Inventory

Telesis

TOC

= Q i ( SP VE ) system
i= products

per time unit from the

OE = All expenses not identifiable as variable expenses for any product I = Fixed Assets + Inventory
Telesis

TOC Q i ( SP VE ) i - OE ROI = ---------------------------------F. Assets + Inventory

Telesis

TOC
Q i ( SP VE ) i - OE ROI = ----------------------------------F. Assets + Inventory

Telesis

Throughput

Throughput : dependent on - Production rate at the bottleneck - Set-up / Change-over time at the bottleneck - Transport time within the unit - Rework at the bottleneck - Rejection at and after the bottleneck; as well as in the system - Downtime at the bottleneck
Telesis

Throughput (SP VE)

Selling Price : dependent on - Market - Lead time to customers utilization of resources cycle time - Excess produced - Produced late - Seconds / Quality downgrade(COPQ ?)

Telesis

 All efforts are made to reduce Cycle Time

time to produce; whereas the customers suffer the cycle time

Cycle time is a function of WIP

Time to produce

Telesis

Throughput (SP VE)

Variable Expenses : dependent on - Cost of raw materials - Cost of packing materials - Rework - Manufacturability (designed quality) - Freight - Commission to selling agents

Telesis

Operating Expenses

Dependent on - Depreciation - Interest on long-term loans - Interest on working capital - Utilities - Salaries (ctc) - Wages (ctc) - Insurance, etc.
Telesis

60

Mean Cycle Time

50 40 30 20 10 0 0 0.1 0.2 0.3 0.4 0.5 0.6 0.7

Telesis

Thank you

visit www.toc.com www.rogo.com www.goldratt.com

Telesis