Fabian Unghanse • June 2013 • LTH

Employing Theory of Constraints inWarehousing Operation: Case Study at

Harald Pihl ABFabian Unghanse

Department of Industrial Management & LogisticsFaculty of Engineering, Lund University

Box 118, 221 00 Lund, Swedenfabian@unghanse.se

Abstract

This article is based on a master thesis that employes Theory of Constraint to a warehouse operational.The foundation of the thesis is to understand why warehouses still encounter problems with theiroperational work, even though warehouse operational is a well explored field with numerous of theoryproviding strategies and solutions to improve warehouses at a operational level. Warehouse managers needa philosophy and/or tool to evaluate and select which solutions and strategies to implement to the theirwarehouses. This is where Theory of Constraints becomes valuable since it is a management philosophy forimprovements work. To investigate if warehouse managers could benefit from Theory of Consatraint a casestudy was performed and evaluated at Harald Pihl AB, where the goal was to improve their warehouseoperation.

I. Introduction

The role of the warehouse has changeda lot over the past years. It has trans-formed from being just a costly storage

room close to customers to a value-adding keycomponent in any supply chain. This changehas increased the pressure on how the oper-ational work is executed. With this change alot of theory has been developed for the ware-house operation field and there are solutionsand strategies for all common problems of op-erational work. In spite of this warehouse man-agers struggle to implement the right solutionsand strategies to maintain the performance ofthe warehouse. The warehouse managers needa tool to help them identify problems, evaluatesolutions and strategies as well as to imple-ment the changes. Theory of Constraints is ayoung management philosophy for improve-ments work. It has been successfully employedinto a great variety of business areas and logis-tic problems have been solved by employingthis philosophy. To investigate if Theory ofConstraint can be employed to warehouse op-

eration, a case study was executed at HaraldPihl AB, who has a warehouse with low levelof strategies and a need for increased perfor-mance to maintain their service level in thefuture.

II. Problem & Case description

Warehouse managers need a tool to use whenthey plan to execute improvements work fortheir warehouse operation. It is hard for man-agers to realize what the actual problems andbottlenecks are. When bottlenecks are iden-tified they need to be solved which could bevery complicated, even though the literatureon warehouse operation provides numeroussolutions and strategies for common problems.Each warehouse is unique and a specific solu-tion might only be optimal for a certain type ofwarehouse. This forces manager managers toevaluate solutions in detail which can be cum-bersome when just reading about them. Thelast step towards an improved warehouse isto implement the selected solutions and strate-

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Fabian Unghanse • June 2013 • LTH

gies, which might be the most critical stepsince it may bring a lot of value if performedcorrectly but may also cause new serious prob-lems to arise when executed erroneously.

Theory of Constraint is a management phi-losophy for improvements work that has beenemployed to help solving different problemswithin logistics and was from the beginning aproduction technology. This philosophy hasacquired a lot of success in many different busi-ness areas. Warehouse operation is an areawhere it has not yet been employed but anarea that could be very beneficial by doing so.The thesis and the case study focused on re-vealing the answers for three research questionthat could provide enough information abouthow to use Theory of Constraints for differentstages in the improvements work.

RQ 1 How ToC can be employed in a ware-house operation to identify bottlenecks?

RQ 2 What tools and techniques should beused to solve/reduce the identified bot-tlenecks?

RQ 3 What future plan can be developedbased on ToC?

To answer these research questions a casestudy was performed at Harald Pihl AB. Har-ald Pihl AB is northern Europe largest alloysand titanium retailer and is situated north ofStockholm. They built their head quarter andwarehouse in 2006 and have since steadily in-creased their market share and sales annually,which they believe will continue. The increasedsales have put higher pressure on the ware-house performances. Until today the ware-house have had low degree of strategies on ev-ery level and due to a lot of tied up capital thecompany wants to improve their operationalwork with the resources they have today. Theirmain existing strategy is to ship all orders ar-riving before noon the same afternoon, this isalso their desired service level and part of theircustomer contract which they wish to maintainin the future, even if sales are forecasted toincrease from 6000 to 7500 orders per year.

III. Method

The thesis had an induction approach, mean-ing that it is based on existing theory andafter real-life observation theoretical conclu-sions were made to develop a new framework.The method used to conduct the research wasexplorative case study where the aim was tounderstand how a phenomena performs. To beable to execute the case study different typesof data collections were made, where the mostfrequent used data collection method was ob-servations. Observations were made to collectdata about different flows in the warehouseas well as to see how different activities wereperformed. Interviews were also a central partof the data collection. They were held in thebegging of the project to identify goals, expec-tations and problems and further on duringthe project they were held to confirmed theobservations. Relevant literature has been usedthroughout the entire project in order to under-stand and learn about Theory of Constraintsand to explore possible solutions for the casestudy.

The thesis process was carried as follows:Theory of Constraint was studied until a guideon how to use the philosophy could be estab-lished. When Theory of Constraints was learntthe case study started by first identifying thecore problems in the warehouse operation, fol-lowed by seeking and finding solutions to thecore problems and finally an implementationplan was conducted. After the case study wasdone the results and the work was analyzedand final conclusions were drawn.

IV. Frame of References

IV.1 Warehouse operation

Warehouse operation mainly consist of fouractivities:

• Receiving & Shipping• Put-Away• Storage• Picking

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These four activities were deeply studied in theliterature by identifying common and generalproblems and also by providing solutions andstrategies to overcome them. The literatureidentifies a few common non value-addingsub-activities, such as transport, material han-dling and space utilization. The solutionsand strategies in the literature try to improvethese and more undesirable actives that mayoccur in a warehouse. The idea for receivingand shipping is to match these activities sothat material can go straight from a receivingdock to a shipping dock without the need ofstorage or allocating the docks in between tominimize the transport from the docks to thestorage area. Picking is the most labor intenseand time consuming activity in the warehouseand therefore addressed in a lot of literature.The picking process is similar to the put awayprocess and the strategies used for pickingcan be applied for the put-away process aswell. The actives are executed most optimalby batching orders, pick or put-away multi-ple orders at the same time, or zoning; oneemployee is responsible for a certain area andhave to pick and put-away all material that isrequired form that area. For storage, the focusis on utilizing the space as efficient as possibleindicating that the type of goods stored has akey influence. Mainly, a warehouse can eitherhave single deep storage; every location canbe reached by hand or truck, or multi-deepstorage where goods are stored behind eachother. For multi-deep storage the warehousecan apply First-In-First-Out (FIFO) or First-In-Last-Out (FILO) approach. To be abel toapply FIFO the storage most be designed sopicking and put-away is done from differentsides of the storage and for FILO the pickingand put-away is done from the same side.

IV.2 Theory of Constraints

Theory of Constraints is a management phi-losophy created by Dr Elyahu Goldratt in thebeginning of 1980 and have since developedfrom a production technology to the philos-

ophy it is today. The philosophy is used toperform improvements work and has becomebroad enough to be employed in almost anybusiness area. The Theory of Constraints viewsthe undertaken situation as a system with sub-activities and tasks where the aim is not tosolve single activities or task but to find solu-tions to improves the whole system. In orderto succeed in doing so, Theory of Constraintsprovides a clear approach and user-friendlytools. The approach is called focusing stepsand can be applied as an overall approachfor the project or be employed for every taskwithin the, project depending on the scope ofthe project. The approach is the following:

• Set up the system’s goal• Determine the performance measures.• Identify the system’s constraint(s)• Decide how to exploit the system’s con-

straint• Subordinate everything else to the deci-

sions made in steps 3 and 4• Elevate the system’s constraint(s)• Do not allow inertia to be the system’s

constraint. When a constraint has beenbroken, go back to step 1

Constraints are identified as activities thatcauses undesirable effects to occur in the sys-tem and are not caused by other activities. Un-desirable effects are effects that prevents thesystem from performing at its best. To be ableto identify, exploit and subordinate the systemTheory of Constraints provides five tools thatall goes under the name of Thinking Processes.These tools are, as the name suggests, tools forthinking and consists of a flow chard. Theyare all user friendly the outcome can be un-derstood by almost anyone. The tools are thefollowing:

1. Current Reality Tree The Current RealityTree is mapped over the current systemand is used to identify the constraints andhow they effect each other and causesactivities to arise. By comparing theconstraint and to see which ones thathave the highest influence on the unde-sirable effects the core problems, which

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are preferable to start to improve, can beidentified.

2. Evaporating Cloud The Evaporating Cloudis a problem solving tool that views aproblem as a conflict between two ar-guments that strive for the same goalbut can not co-exist in the current situa-tion. By viewing the problem as a conflictmore creative solutions can be found.

3. Future Reality Tree The Future Reality Treeis a map over how the system will lookand how activities will effect and developother activities. It shows if the undesir-able effects will disappear and if any neweffects will arise. The map is an effec-tive tool to use to overcome resistance tochange.

4. Prerequisite Tree The Prerequisite Tree isa implementation tool that identifies ob-stacles that might occur from the imple-mentation. The aim is to lock down theobstacles and to find ways to overcomethem before they arise.

5. Transition Tree The Transition Tree is anaction plan for how the implementationshould be executed. It too tries to iden-tify if the implementation will bring newundesirable effects that can be preventedbefore they arise.

V. Case Study

The case study was started by performinginterviews to be able to set the goals, findexpectations and identify the problems. Toget an understanding of how the warehouseperformed and to identify the flows in thewarehouse, observations were held. From theobservations undesirable effects were identi-fied. These were double handling, a lot ofresources are used for every put-away andpick, resources are not ready to be used andincoming and outgoing goods are placed in-appropriate. By combining the observationand the undesirable effects the Current Realitytree could be developed and the core problems

where identified to be the way the companysorted their orders that should be pick forthe day as well as the infrastructure & design,meaning where resources and storage areasare located, the layout in the storage and inwhat order tasks are executed.

The idea was to extinguish as many of theundesirable effects as possible by solving thecore problems. Three main conflicts were iden-tified and solved. The first conflict dealt withhow the orders were sorted, the second wasabout how to handle incoming and outgoinggoods and the third conflict was the structureand strategy about a specific storage area, hold-ing lighter goods for hand picking.

The solutions that were found were to intro-duce a new order sorting algorithm, install twonew storage racks for incoming and outgoinggoods as well as packaging material and toredesign the hand picking storage area to aForward Picking Area with a new strategy.These solutions were taken into considerationand by introducing hem to the Current RealityTree, the Future Reality Tree was developedand the benefits of the new solutions appeared.

A Prerequisite Tree was developed afterthe solutions had been presented for the com-pany. From the presentation it was clear thatthe change of strategies and routines for theemployees would be the largest obstacles toovercome for the solutions to become suc-cessful to the warehouse. To overcome theseobstacles, seminars and workshops should beexecuted where the employees can understandthe changes and see the benefits of them.

The last step was to conduct the actionplan for the implementation and the TransitionTree identified how much time and resourcesthat would be necessary to use for the differ-ent implementations while at the same timeshowing what effects that could come fromthe implementations. There are three criticalimprovement areas to block out the possibleundesirable effects. The sorting algorithm has

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to be designed in an accurate way from thebeginning, the redesign of the hand pickingstorage area and the allocating of the goodsmust be determined before the physical changework start and how to split the new racksbetween incoming and outgoing goods andpackaging material must be predetremined.

VI. Conclusions

From studying the literature of warehouseoperation it can be said that there are lots ofdifferent good solutions and strategies thatcan be adapted to a warehouse in order toincrease the improvements, but there is nogood existing tool to evaluate what to choose.By employing Theory of Constraints the wholechange of operational work in a warehouse canbe facilitated. From the case study it can besaid that the approach of Theory of Constraints,the Focusing Steps, should be followed. Thetwo first steps are essential to form a base forthe task and the following five steps drives theimprovements work forward. It is better toexecute a few steps correctly than to executeall steps carelessly because there is no pointto continue improving if the foundation is notbuild correctly. The Focusing Steps can eitherbe used as an overall approach for the projector be employed to every task within the project.

It is a good approach since by employing it totasks in the project the tasks can be executedeasier and with better outcome which will leadto a better outcome overall. To answer theresearch questions, the approach should beused to every activity and the tools should beused follows:

RQ 1 Current Reality Tree

RQ 2 Evaporating Cloud and Future RealityTree

RQ 3 Prerequisite Tree and Transition Tree

By following the approach and employing theright tool for each task should facilitate theevaluation work for warehouse managers thatlook for new solutions and strategies to im-plement to improve their warehouse. It doesnot take long to learn and understand Theoryof Constraint and after some training it is nothard to use it in reality.This study is based on one case study per-formed at a warehouse that had low level ofstrategies and only one loop of the focusingsteps were executed, which created a need forfuture studies within this area which could in-clude either multiple loops with this approachor to employ Theory of Constraints to a ware-house with higher level of existing strategies.

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