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Systems Thinking and the Theory of Constraints. The “Job-Shop” Simulation. 4 types of products. Product #1. Product #2. B. Start. B. Start. Finish. Finish. A. D. A. D. C. C. Product #3. Product #4. Finish. B. B. Start. Start. A. D. A. D. C. C. Finish.

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Systems thinking and the theory of constraints

Systems Thinking and the Theory of Constraints


The job shop simulation

The “Job-Shop” Simulation

  • 4 types of products

Product #1

Product #2

B

Start

B

Start

Finish

Finish

A

D

A

D

C

C

Product #3

Product #4

Finish

B

B

Start

Start

A

D

A

D

C

C

Finish


The job shop simulation1

The “Job-Shop” Simulation

  • Objective: Produce “kits” of products

    • Each kit requires one job of each type

  • Number of days given to complete kits: 20 days

  • Scorecard: Teams will be “graded” based on:

    • No. of kits produced

    • Tie-breaker 1: Max. flow days

    • Tie-breaker 2: Total no. of products produced


The job shop simulation scorecard

The “Job-Shop” Simulation: Scorecard


The job shop simulation2

The “Job-Shop” Simulation

  • What could we have done better?

    • Manage the bottleneck better, right?

    • How can we do that?


Systems thinking

Systems Thinking

  • Integrated decision making

    • “Big Picture” Thinking

    • Thinking “Globally” rather than “Locally”

      • Understanding how localized decision making can affect the overall goal


The theory of constraints

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

Traditional Decision Making

The “Cost World” Perspective


Traditional decision making1

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.


The cost world perspective cost and ppm quality

The Cost World Perspective: Cost and PPM Quality

$60,000

$20,000

Do It!

8%

2%

$15,000

$20,000

Maybe?

2%

0.5%

Do NOT Do

$4,000

$20,000

0.5%

0.1%


Is 99 5 quality good enough for you

I’ll do better

next time!

No problem. Everything is OK!

Is 99.5% Quality Good Enough For You?

If it is, then you won’t mind if:

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

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

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


The cost world perspective cost and inventory turns

The Cost World Perspective: Cost and Inventory Turns

Do It

Maybe?

Do NOT Do

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


The real cost of inventory

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.


Traditional decision making2

Traditional Decision Making

Inventory Valuation and Cost Accounting


An inventory conundrum

An Inventory Conundrum

Raw Material cost per unit:$10

WIP value per unit:$20

Finished Goods value per unit:$35

Sale Price per unit:$50

Other Operating Expenses: $4 Million in 2006; $3.75 Million in 2007

20062007

Beginning WIP Inventory (1000 units) 50 50

Beginning FG Inventory (1000 units) 40 40

Raw Material (1000 units) 400 330

Sales (1000 units) 400 400

Ending WIP Inventory (1000 units) 50 10

Ending FG Inventory (1000 units) 40 10


An inventory conundrum the income statement

An Inventory Conundrum: The Income Statement

20022007

Sales (1000 $)

Beginning WIP Inventory (1000 $)

Beginning FG Inventory (1000 $)

Raw Material Purchase (1000 $)

Other Expenses (1000 $)

Ending WIP Inventory (1000 $)

Ending FG Inventory (1000 $)

Cost of Goods Sold (1000 $)

Profit (1000 $)

20,000

20,000

1,000

1,000

1,400

1,400

4,000

3,300

4,000

3,750

1,000

200

1,400

350

8,000

8,900

12,000

11,100


Traditional decision making product costs

Traditional Decision Making:Product Costs

  • How can we calculate a company’s profit?

Net Profit = Sp Revenuep - Sc Expensec.

But how do we use this information to, say, decide on launching a new product?

  • Allocate! If we allocate overhead costs correctly:

Net Profitp = Revenuep - Expensep, and so,

Net Profit = Sp Net Profitp


Obtaining accurate product costs

Obtaining Accurate Product Costs

  • How do we allocate overhead costs properly so that product costs are accurate?

    • Standard Costing

    • Activity Based Costing (ABC)


Exercise in cost accounting cromby steele and nash inc

Exercise in Cost Accounting:Cromby, Steele and Nash, Inc.

CSN, Inc. is a home maintenance services operation, started by three men, Cromby, Steele, and Nash.

Services offered: Plumbing, Window Cleaning, Gutter Guard Installation, and Landscaping.

There is ample demand for these services. However, there is also a shortage of qualified workers in the area.

CSN has had a motto: “Teach Your Children Well,” ever since their young-er days. They have employed their children, 5 high-school graduates, to run operations.


Csn inc labor costs

CSN, Inc.: Labor Costs

Monthly wage per employee = $2,000 including benefits

Hours budgeted per employee per month = 200 hours

Monthly capacity with 5 employees = 1,000 hours

Total Direct Labor cost per month = $10,000

Direct labor rate = $10,000/1,000 = $10 per hour


Csn inc revenue cost data

Job Type

Plumbing

Window Cleaning

Gutter Guards

Landscaping

Current Monthly Output

Labor Hours/job

2 hours

90 jobs

70 jobs

4 hours

3 hours

80 jobs

60 jobs

5 hours

Revenue/job

$130

$170

$200

$250

Material Cost

$30

$10

$70

$75

Labor Cost

$20

$40

$30

$50

CSN, Inc.: Revenue & Cost Data

Note:

Total number of jobs per month = 90 + 70 + 80 + 60 = 300 jobs.

At current output level, capacity used= 90 x 2 + 70 x 4 + 80 x 3 + 60 x 5

= 1,000 hours per month


Csn inc overheads

CSN, Inc.: Overheads

Monthly Administrative Overhead (Salaries) = $18,000.

Monthly Non-Administrative Overhead (Rent, Truck Fleet Maintenance, Marketing, Depreciation) = $9,000.

Overhead is currently allocated to products based on production volume. Current volume is 300 jobs per month.

Administrative Overhead per job $18,000/300 = $60.

Non-Administrative Overhead per job = $9,000/300 = $30.


Csn inc summary cost table

Job Type

Plumbing

Window Cleaning

Gutter Guards

Landscaping

Current Output

Labor Hours/job

2 hours

90 jobs

70 jobs

4 hours

3 hours

80 jobs

60 jobs

5 hours

Revenue/job

$130

$170

$200

$250

Material Cost

$30

$10

$70

$75

Labor Cost

$20

$40

$30

$50

Administrative Overhead Allocation

$60

$60

$60

$60

Non-Administrative Overhead Allocation

CSN, Inc.: Summary Cost Table

$30

$30

$30

$30


Systems thinking and the theory of constraints

Cromby, Steele & Nash, Inc.

CSN is using all its labor capacity, and is absorbing all overheads. So there is no labor variance or overhead absorption variance to worry about.

Therefore, the total profit is:

90 x (-$10) + 70 x $30 + 80 x $10 + 60 x $35 =

$4,100 per month.


Csn inc activity based costing

CSN, Inc.: Activity-Based Costing

CSN, Inc. wants to use a better method to allocate the overheads (usingActivity-Based Costing).

To accurately allocate Administrative Overhead, CSN gathers data on the time the administrators, Cromby, Steele and Nash, devote to the four products, each month. The data reveals the following breakdown on the time administration spends on the 4 products:

Plumbing: 30%; Window Cleaning: 35%

Gutter Guards: 20%; Landscaping: 15%


Csn inc administrative overhead allocation using abc

Job Type

Plumbing

Window Cleaning

Gutter Guards

Landscaping

Percentage Effort

Admin O/H Allocated = %age effort x $18,000

$5,400

30%

$6,300

35%

20%

$3,600

15%

Number of Jobs

90 jobs

70 jobs

80 jobs

60 jobs

Administrative O/H Allocation per job

$60

$90

$45

CSN, Inc.: Administrative Overhead Allocation using ABC

Administrative Overhead to be allocated = $18,000

$2,700

$45


Csn inc non administrative overhead allocation using abc

CSN, Inc.: Non-Administrative Overhead Allocation using ABC

Non-Administrative Overhead to be allocated = $9,000.

The allocation is made based on labor hours.

Total labor hours = 1,000. So,

Non-Admin. O/H rate = $9,000/1,000 = $9.00 per labor hour.

Since Plumbing takes 2 hours, the Non-Admin. Overhead allocated to a Plumbing job is = $9 x 2 = $18.

Thus the Non-Administrative Overhead allocation per job is:

Plumbing (2 hours): $18;W. Cleaning (4 hours): $36

G. Guards (3 hours): $27;Landscaping (5 hours):

$45


Csn inc improved allocation with abc

Job Type

Plumbing

Window Cleaning

Gutter Guards

Landscaping

Labor Hrs./job

Current Output

2 hours

90 jobs

70 jobs

4 hours

3 hours

80 jobs

60 jobs

5 hours

Revenue/job

$130

$170

$200

$250

Material Cost

$30

$10

$70

$75

Labor Cost

$20

$40

$30

$50

Administrative Overhead Allocation

$60

$90

$45

$45

Non-Administrative Overhead Allocation

CSN, Inc.: Improved Allocation with ABC

$18

$36

$27

$45


Csn inc demand for services

CSN, Inc., Demand for Services

Suppose the monthly demand for these services is:

Plumbing:250 jobs

Window cleaning:160 jobs

Gutter guard installs:145 jobs

Landscaping:120 jobs

Suppose, too, that CSN, Inc., can choose which products to go after.

What is the best product offering for CSN, Inc., that will maximize its profit?


Cromby steele nash inc

Cromby, Steele & Nash, Inc.

Can CSN do better? Let’s use ABC cost figures.

Which is the most profitable product?

Compute profits if they first complete meeting the demand for the most profitable product, then focus on the next most profitable product, and so on. Use the following pages for your calculations.

Landscaping


Systems thinking and the theory of constraints

Cromby, Steele & Nash, Inc.

First complete demand for 120 Landscaping jobs.

That uses up , leaving of capacity.

Next work on Gutter Guards. Each job takes 3 hours.

400 hours

600 hours

Can complete 400/3 =133 jobs.

(1 hour of labor unused.)

With this product mix, the apparent profit seems to be:

120 x $35 + 133 x $28 = $7,924.

Not the true profit. Why?

Answer: Unabsorbed overheads.


Csn inc reconciling variances

CSN, Inc.: Reconciling Variances

120 Landscaping and 133 Gutter Guard jobs will each recover $45 of Administrative Overhead, that is:

$45 x 120 + $45 x 133 = $11,385.

Admin. Overhead Variance =

$18,000 - $11,385 = $6,615.

The 1 hour of unused labor gives a Labor Usage Variance of $10 and Non-Admin. Overhead Variance of $9.

So, the total of all the Variances is:

$6,634.

Actual profit with ABC is thus:

$7924 - $6,634 = $1,290.

So, “optimal” profit is less than earlier profit! Why?


Systems thinking and the theory of constraints1

Systems Thinking and the Theory of Constraints

The “Throughput World” Perspective


The theory of constraints1

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.


Toc performance measures

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.


Systems thinking and the theory of constraints

The Goal: To Make Money

  • Bottom Line Measurements

NET PROFIT

(Absolute)

RETURN ONINVESTMENT

(Relative)

CASH FLOW

(Survival)


Relating toc measures to traditional measures

  • Return on = Net Profit =T - OE Investment “Inventory” I

  • Asset =Throughput = T

    Turns “Inventory” I

Relating TOC Measures to Traditional Measures

  • Net Profit = T - OE

  • T = Sales Revenue - Variable Cost (Materials)

  • OE = Fixed Costs (DL + Overhead)


Priorities in traditional world

Priorities in Traditional World

First:OE

Second: T

Distant Third: I


Where is the bang for the buck t vs oe

Where is the Bang for the Buck? (T vs. OE)

Leverage from

Decreasing OE

Leverage from

Increasing T

$

Revenue 100

RM 40

DL 10

OH 40

Cost 90

NP 10

100

114

40

48

0.95(100) = 95

1.20(95) = 114

8

10

40

40

88

98

12

16

Assume a) you have 20% excess capacity, and b) sales will increase by 20% if you can effect a 5% price reduction.


Shifting paradigms

Shifting Paradigms

Current Priority

First: OE

Second: T

Third: I

New Priority

T

I

OE


Systems thinking and the theory of constraints

How to Make Money:

The Importance of Throughput

Lean Supply Chain Principle 12:

Decisions should promote a growth strategy. While enterprises should try to simultaneously increase throughput, decrease inventory, and decrease operating expenses, the focus must be on improving throughput.


Csn inc a better approach

CSN, Inc.: A Better Approach

  • Consider only the variable costs in the profit equation – use marginal profits.

  • Focus on the constraint. Evaluate rate at which marginal profits are generated at the constraint (Throughput). Best product is the one with the highest Throughput. Complete demand on this product, move to next most profitable product, and so on, till you run out of capacity at constraint.

  • Find total marginal profit, and subtract out fixed costs to get total net profit.


Cromby steele nash inc1

Cromby, Steele & Nash, Inc.

Capacity at the constraint (total labor hours) = 1,000 hours.

Fixed costs are: Labor + Administrative O/H + Non-Admin. Overhead

= $10,000 + $18,000 + $9,000 = $37,000.


Cromby steele nash inc2

Cromby, Steele & Nash, Inc.

Do 250 plumbing jobs first (250 x 2 = 500 hours).

Next, do 145 gutter guards (145 x 3 = 435 hours).

With the remaining 65 hours, you can complete 65/4 = 16 window cleaning jobs (64 hours)

Net Marginal Profit = 250*$100 + 145*$130 + 16*$160 = $46,410.

Subtract fixed costs ($37,000) for net profit = $9,410.

This approach is known as Throughput Accounting


Csn inc summary

CSN, Inc.: Summary

Summary:

Profit with arbitrary product mix: $4,100

“Optimal profit” with ABC: $1,290

Optimal profit with Throughput Accounting: $9,410


Systems thinking and the theory of constraints2

Systems Thinking and the Theory of Constraints

The Job Shop Simulation Revisited


The job shop simulation revisited

The “Job-Shop” Simulation Revisited

Product #1

Product #2

Start

B

B

Finish

Start

A

D

A

D

C

C

Finish

Product #3

Product #4

B

Finish

B

Start

Start

A

D

A

D

C

C

Finish

Note: This is a different Job Shop


The job shop simulation3

The “Job-Shop” Simulation

  • There are 4 operators. Each operator works 20 days a month at a salary of $2,400 per month.

    • The wage rate is set at $120 per operator per day.

    • Total labor cost is $9,600.

  • The overhead cost (salaries, depreciation, utilities, maintenance, etc.) adds up to $33,600 per month.

  • Overhead is allocated based on labor cost as follows: $33,600/$9,600 = 350% of direct labor cost.


Systems thinking and the theory of constraints

Job Shop Simulation: Product Costs

  • Suppose material costs for the 4 products are:

  • Labor Cost is $120 per operator per day

  • Overheads are charged at 350% of direct labor cost

  • Selling price markup is 30% over total cost.

  • Which product(s) should the company focus on?

Product 1: $1,500 Product 2 : $2,500

Product 3 : $2,500 Product 4 : $2,000


Systems thinking and the theory of constraints

Profit Contribution Calculations

for the 4 Products

Product

Matl. Cost (M)

Labor

(L)

Over-head (O)

Product Cost = M+L+O

Sales Mark-up (%)

Sales Price

Contri-bution

Which job(s) will make the company the most money? Rank them

1

3

1500

480

1680

3660

0.30

4758

1098

2

1236

2500

360

1260

4120

0.30

5356

2

3

1

2500

480

1680

0.30

6058

4660

1398

4

4

2000

360

3620

0.30

4706

1086

1260


The job shop simulation scorecard1

The “Job-Shop” Simulation: Scorecard


The theory of constraints2

The Theory of Constraints

The Five-Step Focusing Process


The throughput world the five step focusing process of toc

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


Types of constraints

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.


Policy constraints

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


Example of a measures constraint the sales department

Example of a Measures Constraint:The Sales Department

  • A 1% sales commission: 2 products:

    • Cadillacs:$40,000

    • Beetles:$20,000

  • Which product will the sales person push?

  • Suppose the profit margins are

    • Cadillac:$1,500

    • Beetle:$2,500

  • Which product will the CEO want you to push?

Conflicting goals (local and global).


Effect of performance measures

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.”


Effect of performance measures1

Effect of Performance Measures

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

“Not even me.”


Identifying constraints

Identifying Constraints

  • Identifying Physical Constraints:

    • A Typical WIP Inventory Profile:

Ave. WIP Inventory

R1

R2

R3

R4

R5

R6


How can we get the most from physical constraints

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?


An example a plant producing 2 products

An Example: A Plant Producing 2 Products

$90 / unit

$100 / unit

Q:

P:

100 units / week

50 units / week

D

D

Purchased Part

15 min.

5 min.

$5 / unit

C

B

C

10 min.

5 min.

15 min.

B

A

A

15 min.

15 min.

10 min.

RM1

RM2

RM3

$20 per

$20 per

$20 per

unit

unit

unit

Time available at each work center: 2,400 minutes per week

Operating expenses per week: $6,000

A Production System Manufacturing Two Products, P and Q


Can we meet the demand

Processing Requirements (all times in minutes)

Can We Meet The Demand?

  • Perform a Capacity Analysis

  • Available time / week on each resource: 2400 min.


Can we meet the demand1

Can We Meet The Demand?

Resource requirements for 100 P’s and 50 Q’s:

  • Resource A: 100 x + 50 x = minutes

  • Resource B: 100 x + 50 x = minutes

  • Resource C: 100 x + 50 x = minutes

  • Resource D: 100 x + 50 x = minutes

15

10

2000

3000

15

30

1750

15

5

1750

15

5


Any bottlenecks

Any Bottlenecks?

  • B is a bottleneck.

  • A, C, & D are not bottlenecks.

  • We cannot achieve desired levels of production due to the capacity constraint on B.

  • What production levels do we set for P & Q?


The production decision

The Production Decision

  • Which product has higher profit margin?

    • Product P:

    • Product Q:

  • Which product requires less effort?

    • Product P:

    • Product Q:

$45

$60

60 min.

50 min.

P

  • So, is the star and is the “dog.” First we’ll offer the star to the market. If we have residual capacity, we’ll offer the dog! Okay?

Q


What is the net profit

What Is The Net Profit?

30

1500

  • For 50 units of Q, need 50 x = min. on B, leaving min. on B, for product P.

  • Each unit of P requires minutes on B. So, we can produce units of P.

  • If we sell 50 units of Q and units of P, we get 50 x $60 + x $45 = $ per week.

  • After factoring in operating expense ($6,000), we

900

15

900/15 = 60

60

5700

60

(Whoops!)

LOSE $300!


Do we shut the plant down

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.


Exploiting the constraint

Exploiting The Constraint

  • Each unit of Q brings $ to the company.

    • How many minutes of B for one unit of Q?

    • So, with Q, we receive $ per constraint minute.

  • Each unit of P brings $ to the company.

    • How many minutes of B for one unit of P?

    • So, with P, we receive $ per constraint minute.

60

30

60/30 = $2

45

15

45/15 = $3


Throughput world vs cost world

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


Which perspective is correct

Which Perspective Is Correct?

  • 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

1500

900

30

900/30 = 30

30

6300

30

$300


Cost world or throughput world

Cost World or Throughput World?

  • What product will you focus on?

P

“Yes, there are two paths you can go by, …

But in the long run,

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


The job shop simulation4

The “Job-Shop” Simulation

Product #1

Product #2

Start

B

B

Finish

Start

A

D

A

D

C

C

Finish

Product #3

Product #4

B

Finish

B

Start

Start

A

D

A

D

C

C

Finish


Systems thinking and the theory of constraints

Profit Contribution Calculations

for the 4 Products

Product

Material Cost

Marginal Contribution

Marginal Contribution / Bottleneck Days

Revised Ranking (Old Rank)

Sales Price

# Bottle- Neck Days Needed

1

1

1 (3)

1500

4758

3258

3258

2

1

2 (2)

2500

2856

5356

2856

3

2

4 (1)

2500

6058

3558

1779

4

1

3 (4)

2000

2706

4706

2706


The 5 focusing steps contd

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%”


Do we try to sell in japan

Do We Try To Sell In Japan?

$/Const

Minute

3

2

1.8

1.33


Maybe we should not sell in japan

Maybe We Should Not Sell in Japan?

2

  • Right now, we can get at least $ per constraint minute in the domestic market.

  • So, should we go to Japan at all?

Perhaps not.

  • Okay, suppose we do not go to Japan

    • Is there something else we can do?

  • Let’s buy another machine! Which one?

B

  • Cost of the machine = $100,000.

  • Cost of operator: $400 per week.

  • What is weekly operating expense now?

$6,400

  • How soon do we recover investment?


Recovering our investment

Unit

Profit

$/const

minute

Prod

Type

Plan B

Plan A

$4,500

(100)

P

$45

3.00

D

6.00

$1,800

(30)

Q

$60

2.00

D

P

$27

-

1.80

J

4.00

1.33

Q

$40

-

J

OE

$6,000

$300

Profit

Recovering Our Investment

$4,185

(93)

$3,000

(50)

-

$2,000

(50)

$6,400

$2,785


Systems thinking and the theory of constraints

Welcome to the “Paradise Plant!”


Systems thinking and the theory of constraints

The Paradise Plant!

IF:

Clients never change their mind,

Vendors always supply what we ask for, on time,

Our workers are excellently trained,

Our processes are extremely reliable,

Our quality is superb,

We do not have any absenteeism,

Data is readily available and accurate, and

You can decide on whatever policies you want.

THEN:

Managing production will be a piece of cake, …

right?


Systems thinking and the theory of constraints

The Paradise Plant!

The Simulator provided you with a

paradise plant because all external causes

were eliminated.

Nevertheless,

Was it easy to manage production?


Rethinking project management

Rethinking Project Management

The Critical Chain


Project management characteristics

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


Project management problems usually faced

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


Managing projects under uncertainty

Task 1

Task 2

5

25

Managing Projects Under Uncertainty

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

Assume task durations are uniformly distributed (5,25)

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

30 days


Managing projects under uncertainty1

Task 1

Task 3

Task 2

5

25

Managing Projects Under Uncertainty

  • What else makes project management complex?

    • Consider a slightly more complex project:

Assume task durations are uniformly distributed (5,25)

As before, each task takes 15 days on average.

What is the average project completion time?

33 days

Probability of completing project in 30 days?

36%


Managing projects

Task 1

Task 3

Task 5

Task 2

Task 4

5

25

Managing Projects

  • The affect of resource interdependencies on a simple project:

If each task takes 15 days on average, what is the

probability that the project finishes in 45 days?

Srini; Here we get about 35% slide 86

< 25%


Determining task durations

Determining Task Durations

  • 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 and project durations the traditional way

5

25

Determining Task and Project Durations – the Traditional Way

Task 1

Task 3

Task 5

Task 2

Task 4

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?

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


Project management the traditional way

Project Management - The Traditional Way

  • 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 toc way

Project Management The TOC Way

The Genesis of the Critical Chain


Theory of constraints and the critical chain

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


Managing the critical chain

Managing the Critical Chain

The Critical Chain implementation begins with 3 questions:

  • What to change?

  • What to change to?

  • How to cause the change?


What to change

What to Change?

  • 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 behavioral effects

What to Change: Behavioral Effects

  • 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.


Behavioral effects the student syndrome

Behavioral Effects: The Student Syndrome

100%

75%

Percent of Project Completed

50%

Completion Date

25%

Time Elapsed

Project Due Date


More behavioral effects that increase task and project durations

More Behavioral Effects that Increase Task and Project Durations

  • 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.


Losing time capacity due to uncertainties by inducting asap an mro example

  • Cascade effect within &

  • across projects

  • Pressure to deliver on time

  • Pressure to expedite 

  • Multi-tasking

  • Priority changes

  • De-synchronization

  • Induct Asset ASAP

  • Start repairs ASAP

  • Start buildup ASAP

  • Expediting 

  • Multi-tasking

  • De-synchronization

  • Early release for

  • production

  • Push parts to Back shops ASAP

  • Pull parts from Back shops ASAP

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

Uncertainties multiply

Delays 

Intrinsic

Uncertainties

Start Early

(CT )

Lines

High no. of

jobs in progress

Delays/

Shortages 

Lead time 

Resource contention 

(Queues )

Backshops

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Summary sources of project delays

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

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

Lead Time for Task A?

A6

B6

C6

Lead Time for Task A?


What to change to

What to Change to?

  • 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 to1

What to Change To?

  • 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 to2

What to Change to?

The Rules of the Critical Chain:

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

  • Pipelining: Do not start projects ASAP.

  • Allow explicit buffer time in projects.

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1 critical chain buffering aggressive plans without precise resource schedules

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:

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

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2 pipelining release projects based on constraints instead of starting asap

Pipelining

Most heavily loaded resource

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

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

  • Project starts are based on constraint’s capacity,

  • Pressure to multitask also comes down

Pipelining is more efficient than starting projects ASAP

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3 buffer management allocate resources to tasks based on buffer burn rate

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

Chain 1

Buffer

20% buffer consumed

33% work completed

Chain 2

Buffer

60% buffer consumed

50% work completed

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.

ãRealization Technologies, Inc.


How to cause the change

How to Cause the Change?

  • 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


The critical chain does it work

The Critical Chain: Does It Work?

  • 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


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