Goldratt’ s Goal of the Firm
Performance Measurement: Financial
Net profit
an absolute measurement in dollars
Return on investment
a relative measure based on investment
Cash flow
a survival measurement
Performance Measurement: Operational
1. Throughput
the rate at which money is generated by the system through sales
2. Inventory
all the money that the system has invested in purchasing things it intends to sell
3. Operating expenses
all the money that the system spends to turn inventory into throughput
Does not guarantee profitability
Has throughput increased?
Has inventory decreased?
Have operational expenses decreased?
Unbalanced Capacity

Synchronous manufacturing views constant workstation capacity as a bad decision
The Statistics of Dependent Events
Rather than balancing capacities, the flow of product through the system should be balanced
Capacity Related Terminology
What is a Constraint?
Any factor that limits system performance and restricts its output.

Capacity is the available time for production
Bottleneck is what happens if capacity is less than demand placed on resource
Nonbottleneck is what happens when capacity is greater than demand placed on resource
Capacity-constrained resource (CCR) is a resource where the capacity is close to demand placed on the resource
Saving Time
Drum, Buffer, Rope
Batch Sizes
What is the batch size?

Theory of Constraints (TOC)
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
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.
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.
7 Key Principles of TOC
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.
Bal Seal Engineering Managerial Practice 7.1
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%
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.

Where is the Bottleneck? Example 7.1
Comparing Synchronous Manufacturing to JIT
JIT is limited to repetitive manufacturing
JIT requires a stable production level
JIT does not allow very much flexibility in the products produced
Comparing Synchronous Manufacturing to JIT (Continued)
JIT still requires work in process when used with kanban so that there is something to pull
Vendors need to be located nearby because the system depends on smaller, more frequent deliveries

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