Theory of Constraints & Bottleneck Management

JWI 550 Operations Management, week3 summary, 1/27/13

This was a very challenging and rewarding week with exposure to several core concepts that make up the foundation of operations management. THE GOAL proved to be an unusually exciting read for a business text - a cliff hanger that explored brilliant business principles and touching life issues so beautifully that I could not put down. Easily this book is one of the best I have ever read. The concept of dependent events, statistical fluctuations, bottlenecks and ways to manage them all the while keeping the firm focused on THE GOAL, are delightful and insightful.

Heizer & Render (2011) helped look at the firm through the theory of constraints and provide the basis for a sound process strategy. Gray & Leonard (1995) discussed the fundamental building block of operations management by going over the definition of a process and key metrics to manage a system of processes. Garvin (1981) presented the types of business processes that are suited for various products starting from projects for high value end and ending with continuous process for low cost commodities.

Numerous take aways this week.
This is an amazing class with world class training in OM.
Dr DP



I. Heizer & Render, Chapter 7: Process Strategy
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(i) Goal of Process strategy: To build a production process that meets customer requirements within cost and managerial constraints
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(ii) Four basic process strategies are:
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(a) Process focus (Job Shops)
- many inputs, many different outputs; low volume, high variety; Low utilization, high variable costs; eg hospital
(b) Repetitive focus (Modular & Continuous process)
- Raw material & module inputs, many outputs; assembly line eg. Harley Davidson
(c) Product focus (product oriented)
- few inputs, output varies - size, shape, packaging; high volume, low variety, continuous process eg. Frito Lay potato chips
(d) Mass customization focus (changing customer needs)- many components inputs, many output versions; high volume, high variety; rapid low cost production
postponement - technique to delay customization as long as possible in production process
Build to Order (BTO) - produce to customer order rather than to a forecast
(iii) Process Analysis & Design Techniques include:
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Flowchart
Process mapping (Time function mapping)
Value stream mapping (VSM)
Service blueprinting
(iv) Services process matrix (Customization, Labor)
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Low, Low - Service factory eg. No frills airlines, fast food restaurants
High, Low - Service shop eg. Hospitals
Low, High - Mass Service eg. Retail boutiques
High, High - Professional Service eg. Private banking, Orthodontics
(v) Techniques to improve service productivity
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Separation - structure service to get customers to go where service is offered
Self service - supermarkets
Postponement - customize at delivery
focus - restrict offerings
module - pre-packaged food modules in restaurants
automation - ATMs
scheduling - airline ticket counter
training to clarify service options - after sale maintenance
(vi) Equipment & Technology selection metrics
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Quality, Cost, Capacity, Flexibility
Flexibility - ability to respond to customer needs with little penalty to time, cost or customer value
(vii) Process redesign
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rethink business process fundamentally to bring dramatic improvements in performance
(viii) 4Rs of Sustainability
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Resources - used by production process eg. Ritz Carlton does laundry at nights to save electricity cost
Recycling - of production materials and product components eg. Standard Register recycles paper & metal scraps
Regulations - hospitals need to follow HazMat storage & disposal rules
Reputation - Ben & Jerrys social responsibility; Body Shop environmental sensitivity; Frito Lay solar power

II. Heizer & Render, Chapter 7s: Capacity and Constraint Management
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(i) Capacity (throughput)
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- number of units a facility can hold, receive store or produce in a period of time
- capacity decision determines capital expenditure & fixed cost
- facility size must be chosen to achieve high levels of utilization and high ROI
- long range plan (>1 year), intermediate range (3-18 mo), short range (<3 mo)
- Design capacity: maximum theoretical output in a given time
- Effective capacity: expected output given the plant's product mix, scheduling, maintenance, quality standard
- utilization: actual output as a percentage of design capacity
- efficiency: actual output as a percentage of effective capacity
(ii) Bottleneck analysis
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Capacity analysis: Determine throughput capacityu of entire system of work centers
Bottleneck: Determine the limiting factors or constraints in the system
Process time of a station: TAT
Process time of a system: TAT of the slowest/longest process flow through the bottleneck => determines capacity
Process cycle time: raw process time without waiting
(iii) Theory of Constraints
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(a) Identify the constraints
(b) develop a plan for overcoming the constraints
(c) focus resources to overcome constraints
(d) reduce effects of constraints: offload work, expand capanbility, communicate to all who impact the constraint
(e) repeat to identify new constraints
(iv) Break even analysis
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The point at which cost = revenues
(v) Capacity expansion approaches
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- lead strategy
- lag strategy: delay cap ex
- straddle strategy: delay cap ex


III. Goldratt & Cox , Chapters 11-20
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Dependent events & statistical fluctuations are key factors that shape the throughput of a plant
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Dependent events - an event or a series of events must occur before another can begin
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statistical fluctuations - information that cannot be precisely predicted
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Bottleneck equipment dictate the throughput of a plant
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Bottleneck management techniques include:
(a) release work orders to the system at the pace set by bottleneck's capacity
(b) Drive equipment down time to zero eg. ensure coverage; change lunch rules as needed.
lost time at bottleneck represents lost capacity for the whole system
(d) increase capacity of bottleneck as it increases capacity of the whole system
(c) increasing the capacity of a non-bottleneck station is a mirage
(e) Put Quality Control Checks ahead of bottleneck machines - eliminate defective pieces ahead
(f) train all people to give special care to bottleneck parts
(g) activate additional equipment to increase capacity
(h) assign best people to work on bottlenecks
(i) increase or decrease batch sizes as needed
(j) implement plant-wide priority to manage flow towards THE GOAL


IV. Grey & Leonard, “Process Fundamentals”
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OM: Design, Manage, Improve a set of activities that create products and services and deliver them to customers
Process Flow diagram: process is the basic building block of an operating system; takes input and creates output of greater value to customers
To define the process determine the tasks and flows of information and goods through a process flow diagram
Determine capacity: Analyze each task, compare and check if balanced, identify capacity of slowest task
Measure performance of a process:
  Capacity, thruput time, efficiency, flexibility, quality, cycle time, bottleneck, Idle time,
  Capacity utilization, batch size, set up time, run time, direct labor content, work-in-process
Throughput time: raw process time; function of how process is managed
Flexibility: how long it will take to change the process so that it could use different set of inputs and create a different output
Direct labor content: amount of labor contained in the product
Balanced process: every step in process performs consistently over time with no variability; theoretical construct - not achievable in practice
Imbalanced process: Idle time at non-bottleneck process
Management Decisions: Design choices, Operations decisions, process improvement decisions
Management complexity: process variability and uncertainty in inputs

V. David A. Garvin, "Types of Processes"
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Once the firm's leadership has identified the target market and defined the corporate strategy, managers swing into action.
Informed managers choose the appropriate set of production processes and arrive at key management tasks,
taking into account total cost over life of production equipment, volume, quality, responsiveness,
inputs including raw materials, energy, labor and management know-how and degree of certainty (Garvin et al, 1981).

Production processes can be classified into five types:

When Performance and Quality matter most
(i) Project - Best suited for highest value products that are unique, one-of-a-kind (OOAK) or low volume,
and expensive eg. a race car from Audi. Key Success Factors (KSFs) are Performance and Quality and Cost considerations are secondary.
Production process is a series of discrete steps, highly flexible and adaptable to changes in design and customer requirements.
Sophisticated planning is done (eg. Critical Path Method - CPM, Program Evaluation and Review Technique - PERT) to sequence and schedule tasks.
Other examples include dams, highways, semiconductor production for super computer chips.
(ii) Job Shops - Best suited for high value and customized specialty products that are needed in small volumes
eg. special order prototypes such as Rolls-Royce cars. As in Project production type, persons who are highly skilled in the art and crafts are needed.
Judgment of such experts play a key role in production. Other examples include Hospital emergency rooms, semiconductor factory servicing a high value client
like the US government's department of defense or NASA that need only a few highly engineered parts made to unique and exact specifications.

When Standardization matters most
(iii) Batch Process - Appropriate for standardized products with limited volume and with commonality across tasks. eg. book binderies,
semiconductor production in "pulse mode" for early user hardware delivery.

When Cost is critical as in capital intensive, standardized commodities
(iv) Line flows - Best fit for price sensitive, undifferentiated bulk commodities that are needed in large volume and at low cost.
Tasks are broken down into repetitive, simple operations and division of labor is highly leveraged. Worker skill level needed is low due to higher
level of automation. Workers specialize in small number of tasks. eg. Ford cars from assembly line, semiconductor factory with new technology transferred
to manufacturing mode.
(v) Continuous flows - Ideal for lowest cost highest volume products with limited differentiation. Automation and Standardization trumps flexibility in production.
Workers have low skill level but broader responsibilities. eg. Steel, Chemicals, oil, semiconductor foundry.