AN OVERVIEW OF THEORY OF CONSTRAINTS (TOC)

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AN OVERVIEW OF THEORY OF CONSTRAINTS (TOC)

• Chwen Sheu, Ph.D.
• Paul Edgerley Chair in Bus. Ad.
• Certified TOC Instructor
• Kansas State University

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• If I always think the way Ive always thought I
  will always feel the way Ive always felt
  
• And
• If I always feel the way Ive always felt, I
  will always do the way Ive always done
• And
• If I always do what Ive always done, I will
  always get what Ive always got.
• If there is not change, there is no change

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I. INTRODUCTION TO TOC EVOLUTIONS

• Creative Output Inc., 1976
• The Goal An On-Going Improvement Process, 1984
• Avraham Y. Goldratt Institute (AGI), 1986
• Its Not Luck, 1994
• The Theory of Constraints Its Implications for
  Management Accounting, 1995
• Critical Chain, 1997
• Necessary but not Sufficient, 2000

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II. WHAT IS TOC?

• A. TOC is a management philosophy that emphasizes
  constraint identification and management as the
  keys for achieving an organizations goals.
• B. SYSTEMS, GOALS CONSTRAINTS
• The Goal of a company ?
• Productivity is nothing but

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II. WHAT IS TOC? (Contd)

• C. The Chain Analogy
• The strength of a chain is governed by its
  weakest link
• Local Global
• ? Local optimum ? Global optimum

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II. WHAT IS TOC? (Contd)

• D. Types of Constraints
• Physical constraints
• Nonphysical constraints

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III. TOC APPLICATIONS

• A. Production Scheduling ? The Goal
• B. Continuous Improvement Thinking Process (TP)
  ? Its Not Luck
• C. TOC Performance Measurement
• D. Project Management the TOC Way ? Critical
  Chain
• E. Distribution

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THINKING PROCESS

• A. A generic approach for continuous improvement
• What to Change?
• To What to Change to?
• How to Cause the Change?
• B. the biggest obstacle to successful
  implementation is to overcome resistance to
  change.

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4. Prerequisite tree What currently prevents the
implementation of the injection(s)?
1.Current Reality Tree Why is the system sick?
2. Evaporating Cloud What conflict is preventing
the cure
UDE
Injection
Injection
UDE
UDE
Obst.
Obst.
Obst.
injection
Clouds Objective
IO
IO
IO
UDE
Obst.
Obst.
opposite
Core Problem
IO
IO
IO
Obst.
DE
IO
DE
3. Future Reality Tree Will the injection lead
to all desired effects without creating new UDEs?
DE
Inj
5. Transition tree What actions does the
initiator have to take to effectively implement
the cure?
Objective
DE
IO
Inj
Initiators action
Injection
IO
Initiators action
Initiators action (which deals with Obstacle)
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TOC PERFORMANCE MEASUREMENT

• A. PQ Example
• B. Tell me how you measure me, and I will do as
  I am measured.
• C. Conventional cost accounting systems

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P Q EXAMPLE
P
Q
100 unit/wk 90/unit
80unit/wk 100/unit
Mach A 10 min
Mach D 10 min
Mach C 10 min
Mach B 10 min
Mach C 5 min
Mach D 10 min
Mach B 10 min
Mach A 10 min
RM X 25
RM Y 20
RM Z 20
(1) One unit for each machine type 8 hrs/day 5
days/wk (2) Labor OH 6,000/wk.
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SUPPLY CHAIN MANAGEMENT AN OVERVIEW

• Chwen Sheu, Ph.D.
• Paul Edgerly Chair Professor
• Kansas State University
• (CSCMP Kansas City Roundtable)

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PRESENTATION OUTLINE

• SUPPLY CHAIN MANAGEMENT (SCM) INTRODUCTION
• WHY IS SCM IMPORTANT?
• E-SUPPLY CHAIN
• GREEN SUPPLY CHAIN MANAGEMENT

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1. SUPPLY CHAIN MANAGEMENT (SCM)
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WHAT IS SCM?

• Supply Chain
• A network of of suppliers, manufacturers,
  warehouses, 3PL, retail outlets, customers.
• Supply chain management (SCM)
• The management of flows between and among supply
  chain stages to maximize total supply chain
  profitability

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Traditional Supply Chain Systems
Supplier Manufacturer
Manufacture Wholesale Retail
Customer (1st,2nd,) Plant
Distribution Distribution
Center Center
Reverse Logistics
3rd Party Logistics Providers (3PL)
Material Flow Information Flow
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BEEF SUPPLY CHAIN
Seedstock
Cow/Calf
Stocker
Feedlot
Packer
Processor
Retailer
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SCM Survey 2005 IT Industry (236 firms)
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How IMPORTANT is the SC function to your
organization's business strategy ?
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Who is directly RESPONSIBLE for determining your
SC operations?
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Compared to 2004, how is your SPENDING on SC
likely to change in 2005?
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II. SCM WHY IS IT IMPORTANT?
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SCM ITS A NEW BALL GAME

• Improves Competitiveness
• Efficiency
• Cost Lean manufacturing ? Lean supply chain
  (e.g., Boeing)
• Responsiveness
• Customization (e.g., Dell, Li Fung)

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Efficiency Boeing Example
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Responsiveness Dell

• Why SCM?
• A win-win partnership
• Value-added

1 1 gt 2
We focus on how we can coordinate our
activities to create the most value for
customers. - M. Dell
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BREAKING PARADIGM
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Fashion Industry
Unit Cost Saving 52.72 0
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CREATING VALUES
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A WIN-WIN PARTNERSHIP
Cost saving Lead time reduction
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Implementing SCM requires a fundamental change in
the way firms operate
Gee, we've never done that before, but why not?
Let's give it a try.
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PARTNERSHIP Bullwhip Effect

• PG found that
• Demand variability (Pampers) increases for SC
  members located farther upstream (110)

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Supply Chain Complexity
Supplier Factory Distributor
Wholesaler
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What You See Is Not What They Face
Lee, H, P. Padmanabhan and S. Wang (1997), Sloan
Management Review
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III. E-SUPPLY CHAIN
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E-BUSINESS

• E-Business
• the use of Internet to conduct business
  transactions among buyers, sellers, and other
  trading partners
• B2C B2B

• E-Procurement, E-Manufacture, E-Commerce

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Percentage of Retail E-Sales
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US E-Commerce Growth Trend
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Worldwide E-Commerce Growth
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E-BUSINESS DEVELOPMENT
Scope
Approach
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E-BUSINESS MODEL
Amazon???
Scope of e-Business Application
Approach of Info used
Strategic Approach
Operational Approach
Partial fragmented
Integral
EDI - Electronic Data Interchange. The transfer
of "standardized" data between Trading Partners.
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Video Amazons e-Business

• Draw the supply chain system for Amazons
  e-Business
• What is the major difference(s) in supply chain
  systems between Amazon and a regular local book
  store?
• What makes Amazons supply chain operations more
  challenging than that of a local store?
• What were Amazons e-Business scope and
  approach in late1990s?

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SUPPLY CHAIN AND LOGISTICS MANAGEMENT AT
AMAZON.COM (1)

• 2001 SC Disaster
• Despite its incredible growth in sales to more
  than 3 billion annually, Amazon.com found it
  difficult to be profitable.
• Amazon.coms supply chain losses account for 250
  million, nearly 10 of annual costs.
• Amazons CEO Jeff Bezos set aside 1M for his
  Supply Chain Management Group (SCMG) to evaluate
  the barcode-based product tracking system.
• Amazon's goal is to collaborate with our
  suppliers to increase efficiencies and improve
  inventory turnover, Jim Miller, VP of supply
  chain at Amazon.com.

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SUPPLY CHAIN AND LOGISTICS MANAGEMENT AT
AMAZON.COM (2)

• 2001 Backroom Operations
• Amazon maintains 15 huge DCs where it keeps
  inventory of more than 2.7 million products.
• 2 million Sq. ft. of warehouse space - over 2.5
  times the amount operated by Ingram, the largest
  book distributor in the United States - more
  space is coming.
• Must manage the flow of products from suppliers
  to DC the flow of customer orders from the DC
  to homes.
• 12 of incoming inventory was sent to the wrong
  location, ? lost time and delayed orders.
• Amazon is not as efficient as the most
  efficient offline retailers

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SUPPLY CHAIN AND LOGISTICS MANAGEMENT AT
AMAZON.COM (3)

• Present Rebuild B2B
• Amazon is using IT to more accurately forecast
  purchasing patterns by region, which gives
  suppliers better information about delivery dates
  and volumes.
• Now only 4 of the incoming inventory is
  mishandled.
• Amazon has chosen database and E-business
  software vendor Excelon Corp. to rebuild its B2B
  supply chain.
• Plan to use a private exchange that links the
  company to its suppliers for toys, CDs,
  electronics, and all other products except books.

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E-BUSINESS MODEL
Amazon???
Scope of e-Business Application
Approach of Info used
Strategic Approach
Operational Approach
Partial fragmented
Integral
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E-BUSINESS MODEL

• E-Supply Chain (Integration)
• SCM/Inter-organizational Collaboration IT

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CPFR-BASED COLLABORATION

• E-Collaboration Collaborative Planning,
  Forecasting Replenishment (CPFR)
• A collection of new business practices that
  leverage the Internet e-data interchange
• Strategic partnering ECR/VMI/CR More

• WalMarts Efforts
• Collaborative Forecasting And Replenishment
  (CFAR), 1995
• Collaborated with VICS to develop guidelines
• Developed its first Retail Link CPFR in 1998

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Sam Waltons Belief in Communication
Collaboration
Communicate and share everything you possibly
can to your associated and partners. The more
they know, the more they will understand. The
more they understand, the more they will care.
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CPFR OVERVIEW
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CPFR BENEFITS (Wal-Marts Report)
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N-TIER CPFR
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• Site Interview (2006)
• Current CPFR Practices
• N-Tier CPFR RFID

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Collaboration Matters
Q We suffer adverse business effects when we do
not collaborate with our trading partners.
Base 120 CP manufacturers and 89 retailers
Source 2005 Shared Survey by Forrester Research,
Consumer Goods Technology, and RIS News
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Distrust still hurts relationships
There is a fundamental lack of trust between
manufacturers and retailers.
Base 120 CP Manufacturers and 89 Retailers
Source 2005 Shared Survey by Forrester Research,
Consumer Goods Technology, and RIS News
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POS Data Sharing Still Limited
Q for Retailers How would you describe the data
sharing process for point-of-sale (POS) data?
Extensive 2
Regular19
No sharing49
Limited30
Base 89 Retailers
Source 2005 Shared Survey by Forrester Research,
Consumer Goods Technology, and RIS News
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Do retailers hold back data?
Manufacturers Retailers DO NOT share enough
data, or the right types of data
Base 120 CP Manufacturers
Source 2005 Shared Survey by Forrester Research,
Consumer Goods Technology, and RIS News
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IV. GREEN SUPPLY CHAIN MANAGEMENT (GSCM)
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GSCM SCM EM
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Sustainability

• Development that meets the needs of the present
  without compromising the ability of future
  generations to meet their own needs
• - World Commission on Environment
  Development, 1987

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I think God's going to come down and pull
civilization over for speeding. Steven
Wright
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• THE END OF THE WORLD???
• http//www.youtube.com/watch?v_S70BafVTDwfeature
  related

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WWF's 2006 Living Planet Report

• Humans are stripping nature at an unprecedented
  rate and will need two planets' worth of natural
  resources every year by 2050 on current trends

• Humans' ecological footprint -- the demand
  people place on the natural world -- was 25
  percent gt the planet's annual ability to provide
  everything from food to energy and recycle all
  human waste.

• Rising Population
• Humanity's footprint has more than tripled
  between 1961 and 2003
• World's population 3 billion (1960), 6.5 billion
  (2005), 9 billion (2050).

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ENVIRONMENTAL MANAGEMENT? WHY?

• 12 tons of CO2 per capita are produced per year.
  Only 8 of this emission is managed by nature.
• The average temp of the Earth could raise up to
  5ºC by the end of 21 century ? Sea level could
  rise up to 100 meters.
• A visit to Amsterdam could be soon a submarine
  visit.

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EM? WHY?

• 60 of managers considered environmental issues
  to be highly important, 82 expected the
  importance would further increase in the years to
  come (2002).
• Beyond the Green Corp, Special Report, Business
  Week, Jan 2007
• a new industrial revolution. It is the most
  forceful trend in my lifetime ... it will
  redefine the rules of the game. (CEO, Sony)

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EM DEVELOPMENT

• USA
• Total cost of compliance over the past 25 years
  have exceeded 1 trillion (120 billion
  annually).
• 1970s 2000 federal, state, and local
  e-regulations Today 100,000. Business in LA
  must answer up to 72 separate authorities.
• Computer Takeback Among 28 global computer
  firms, U.S. computer firms rank 9th (Apple), 11th
  (HP).
• 80 of consumer are willing to pay more for
  green.
• Dow Jones Sustainability Index
• It's a difficulty for European firms, and it's a
  huge difficulty for American firms.

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EM DEVELOPMENT

• Japan
• 63 of Japanese consumers are willing to pay 5
  more, 27 pay 15 more for green products.
• Green Products
• Toyota Hybrid Prius uses half the petrol emits
  only half the carbon dioxide.
• Sony Green Partner
• Europe

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Recent European Environmental Directives

• Waste Electrical and Electronic Equipment (WEEE)

• Restriction of Hazardous Substances (RoHS)
• 1.3 M. of Sony Play Stations were returned in
  2001, Netherlands

• Energy-using Products (EuP)

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EM BUSINESS IMPACTS

• Pepsi Saved 44 million by switching from
  corrugated to reusable plastic shipping
  containers for one liter 20 oz bottles,
  conserving 196 million lb of corrugated material.

• Texas Instruments Saved 8 million each year by
  reducing its transit packaging budget for its
  semi-conductor business thru source reduction,
  recycling use of reusable packaging.

• Commonwealth Edison Produced 50 million in
  financial benefits from the implementation of
  Life-Cycle Analysis approach.

• Dow Corning Saved 2.3 million by using
  reconditioned steel drum in 1995. It also
  conserved 7.8 million lb of steel.

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GSCM LIFE CYCLE ANALYSIS
Recycle Reuse Disposal
Retailer/Customer
Design
Raw Mat.
Logistics
Manufacture
Logistics
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CRISIS? OPPORTUNITY?
THE WORST TIME
THE BEST TIME
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We are convinced that being good to the
environment is also good for business and have
every intention of keeping it that way. -
Xerox EHS Progress Report