KRM Chapter 7 Constraint Management

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Constraint Management
Chapter 7
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How Constraint Management fits the Operations
Management Philosophy
Operations As a Competitive Weapon Operations
Strategy Project Management
Process Strategy Process Analysis Process
Performance and Quality Constraint
Management Process Layout Lean Systems
Supply Chain Strategy Location Inventory
Management Forecasting Sales and Operations
Planning Resource Planning Scheduling
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Eastern Financial Florida Credit Union

• What was the problem?
• How did they solve it?

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Capacity Planning

• Capacity is the maximum rate of output of a
  process or system.
• Output Measures
• Input Measures
• Utilization

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Output and Capacity

• What is a Constraint?
• Any factor that limits system performance and
  restricts its output.
• A Bottleneck
• An output constraint that limits a companys
  ability to meet market demand.
• Also called Capacity Constraint Resource or CCR

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Theory of Constraints (TOC)

• A systematic approach that focuses on actively
  managing constraints that are impeding progress.

Constraint Management

• Short-Term Capacity Planning
• Theory of Constraints
• Identification and management of bottlenecks
• Product Mix Decisions using bottlenecks

• Long-term Capacity Planning
• Economies and Diseconomies of Scale
• Capacity Timing and Sizing Strategies
• Systematic Approach to Capacity Decisions

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7 Key Principles of TOC

• The focus is on balancing flow, not on balancing
  capacity.
• Maximizing output and efficiency of every
  resource will not maximize the throughput of the
  entire system.
• An hour lost at a bottleneck or constrained
  resource is an hour lost for the whole system.
• An hour saved at a non-constrained resource does
  not necessarily make the whole system more
  productive.

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7 Key Principles of TOC

• Inventory is needed only in front of the
  bottlenecks to prevent them from sitting idle,
  and in front of assembly and shipping points to
  protect customer schedules. Building inventories
  elsewhere should be avoided.
• Work should be released into the system only as
  frequently as the bottlenecks need it. Bottleneck
  flows should be equal to the market demand.
  Pacing everything to the slowest resource
  minimizes inventory and operating expenses.

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7 Key Principles of TOC

• Activation of non-bottleneck resources cannot
  increase throughput, nor promote better
  performance on financial measures.
• Every capital investment must be viewed from the
  perspective of its global impact on overall
  throughput (T), inventory (I), and operating
  expense (OE).

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Application of TOC

• Identify The System Bottleneck(s).
• Exploit The Bottleneck(s).
• Subordinate All Other Decisions to Step 2
• Elevate The Bottleneck(s).
• Do Not Let Inertia Set In.

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Bal Seal Engineering Managerial Practice 7.1
Theory of Constraints in Practice

• Bal Seal had problems with excessive inventory,
  long lead times and long work hours.
• They were operating above capacity but on-time
  shipment rate was 80-85
• Bal Seal implemented TOC with dramatic and almost
  immediate results.
• Excessive inventory dried up
• Extra capacity was experienced everywhere but at
  the constraint
• Total production increased over 50
• Customer response time decreased from 6 weeks to
  8 days
• On-time shipments went up to 97

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Identification and Management of Bottlenecks

• A Bottleneck is the process or step which has the
  lowest capacity and longest throughput.
• Throughput Time is the total time from the start
  to the finish of a process.
• Bottlenecks can be internal or external to a
  firm.

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Setup Time

• If multiple services or products are involved,
  extra time usually is needed to change over from
  one service or product to the next.
• This increases the workload and could be a
  bottleneck.
• Setup Time is the time required to change a
  process or an operation from making one service
  or product to making another.

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Where is the Bottleneck?Example 7.1
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Barbaras BoutiqueApplication 7.1
Two types of customers enter Barbaras Boutique
shop for customized dress alterations. After T1,
Type A customers proceed to T2 and then to any of
the three workstations at T3, followed by T4, and
then T7. After T1, Type B customers proceed to T5
and then T6 and T7. The numbers in the circles
are the minutes it takes that activity to process
a customer.

• What is the capacity per hour for Type A
  customers?
• If 30 of customers are Type A customers and 70
  are Type B, what is the average capacity?
• When would Type A customers experience waiting
  lines, assuming there are no Type B customers in
  the shop?
• Where would Type B customers have to wait,
  assuming no Type A customers?

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Long-Term Capacity Planning
Constraint Management

• Short-Term Capacity Planning
• Theory of Constraints
• Identification and management of bottlenecks
• Product Mix Decisions using bottlenecks

• Long-term Capacity Planning
• Economies and Diseconomies of Scale
• Capacity Timing and Sizing Strategies
• Systematic Approach to Capacity Decisions

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Long-Term Capacity Planning

• Deals with investment in new facilities and
  equipment.
• Plans cover a minimum of two years into the
  future.
• Economies of scale are sought in order to reduce
  costs through
• Lower fixed costs per unit
• Quantity discounts in purchasing materials
• Reduced construction costs
• Process advantages

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Economies of Scale

• Economies of scale occur when the average unit
  cost of a service or good can be reduced by
  increasing its output rate.
• Diseconomies of scale occur when the average cost
  per unit increases as the facilitys size
  increases

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Capacity Timing and Sizing Strategies

• Sizing Capacity Cushions
• Timing and Sizing Expansions
• Linking Process Capacity and other operating
  decisions.

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Capacity Cushions

• A capacity cushion is the amount reserve capacity
  a firm has available.
• Capacity Cushion 100 - Utilization Rate ()
• How much capacity cushion depends on
• The uncertainty and/or variability of demand
• The cost of lost business
• The cost of idle capacity

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Capacity ExpansionExpansionist Strategy
Staying ahead of demand
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Capacity ExpansionWait-and-See Strategy
Chasing demand
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Linking Process Capacity and Other Decisions

• Competitive Priorities
• Quality
• Process Design
• Aggregate Planning