The primary purpose of a cycle count program is to identify causes of inventory errors

The primary objective of cycle counting is to identify and fix the causes of errors

Turnover = COGS / Avg Inventory

Order point = Demand during lead time + Safety Stock

The lot size affects the product mix cycle

Electronic data interchange (EDI) reduces paperwork

The master production schedule (MPS) is an anticipated build schedule

Driver costs = variable transportation costs

Advantage of point-of-use inventory over central storage is reduced material handling

Total employee involvement will result in an increase of coaching role for first-line supervision

In projecting demand for a standard design commodity competitive pricing is typically most important.

The primary activities of manufacturing planning and control are production planning and inventory

management.

It is important to monitor the forecast to improve forecasting methods.

Lean / JIT sees suppliers as an upstream work center.

In the Toyota Production System the control department concept was the key to breaking down the

silos that cripple an organization

Load profile shows required capacity at each workcenter (where as workcenter profile shows only Rate

Capacity)

Testing questions13 сентября 2011 г.

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Customer does not buy a product or service, but a solution to a problem or a need [1-19].

Supply Chain: The global network used to delivery products and services from raw materials to end

customers through an engineered flow of information, physical distribution, and cash [1-38].

Value Chain consists of processes that directly add value to the products and services that a company

sells.

Value Chain is a high-level model of how businesses receive raw materials as input, add value to the raw

materials through various processes, and sell finished products to customers.

“Ultimately it is the customer who pays the price for service delivered that confirms value and not the

producer who simply adds cost until that point”

SC is the subset of the VC (1-45).

KPIs should represent the 3 types of measures (1-47):

Strategic•

Tactical•

Operational•

Balanced Scorecard (BSC) (1-47) gives a balanced perspective by including metrics and performance

from the following areas:

Customer prospective•

Business process p.•

Financial p.•

Innovation and learning p.•

KPIs should not be generic; they need to measure in areas that are critical to the goals of the company.

The major objective of materials managements is to provide the required level of customer service.

Manufacturing planning and control (MP&C) is the system used by manufacturing to recognize demand

for the products, plan the resourced required to produce them, and execute and control production

(1-53).

Layered approach to planning (details)

Business planning long-term planning in currency

Production Plan medium to long-term at product family level

Master scheduling short to medium-term at the end item product level

Material requirement planning short-term at the end item or product component level

S1: Introduction to SCM15 июня 2011 г.

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Production Environments

Env. When to choose Benefits VATI

Type

ETO Unique design or massive customization is

required; complex products

Enables response to specific

customer requirements

ATO Product which have high number of

configurations or require customization.

Low FG inventory levels;

wide range of product offerings

X

MTO Simple RM, many products (variations) Customization; reduced inventory;

improved service levels

V

MTS High-volume standard products; predictable

demand.

Used when required LT to customer is shorter

than manufacturing LT

F.i., MTS products are expected to be

available on demand.

Low manufacturing costs; meet

customer demands quickly

A

MC High-volume product with large variety

Environment Characteristics [MRP 6-35]

Characteristic MTS ATO MTO ETO

Interface between

production and

customer

low medium medium high

Customer delivery

time

short medium long long

Production volume

of each unit

high medium low low

Production range (#

of products)

narrow medium broad broad

Basis for production

planning and

scheduling

forecast forecast and

backlog

backlog; RM forecast backlog; RM forecast

Seasonality

(likelihood)

high medium low none

Order promising

based on availability

of...

FG components &

subassemblies

RM, capacity RM, capacity,

engineering

Handling of demand

uncertainty

Safety Stock Overplanning of

c&sa (= SS in

c&sa)

Little uncertainty

exists after receipt of

order

Very little uncertainty

exists after receipt of

order

Final assembly

schedule

n/a

MPS used

Determined by

customer orders

Determined by

customer orders

Determined by

customer orders

BOM used Standard

BOM for

each product

Planning BOM BOM unique for each

order

BOM unique for each

order

Manufacturer is

likely to stock

FG RM

Production Environments3 марта 2012 г.

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Process Layout Description

Flow processes Product Layout

Intermittent

processes

Process (Functional)

Layout

Cellular Layout Stations set up in work cells, which have equipments

grouped into product families.

Operators are cross-trained on each operation.

Work cells are traditionally set up in a "U" or "L" shape.

[9-23], MM pg. 118 (14.8 Process systems)

Project processes Fixed position

Layout + - Notes

Product L. low WIP

inventory

high

investments

Process L. each workstation is flexible capable of producing wide

variety of products

Work layouts2 сентября 2011 г.

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Marketing Mix

Product (design, qty, warranty policy, etc.)•

Price•

Promotion•

Place•

Basic demand patterns: [2-13]

Trend: increasing, decreasing, and level•

Seasonal•

Random•

Cyclical: over long time spans•

Principles of Forecasting [2-19]

1 Forecasts are not 100% accurate They are not expected to be.

2 Forecast must include estimate of error % or min-max range

3 Forecasts are more accurate for product

groups than for individual items

4 Forecasts are more accurate in the short

term

It means that lead time reaction allows to

react to more accurate forecasts

Forecasting techniques [2-23] (Detailed in MPR)

Qualitative•

Quantitative•

Extrinsic•

Moving Average○

Exponential Smoothing○

Intrinsic•

The purpose of tracking forecasting is to compare with actual demand and to measure its accuracy

[2-41].

In the process, we can learn the following:

Why demand differs from the forecast•

Take demand circumstances into account•

How to improve the forecast•

Forecast error types: [2-41]

bias;•

random error.•

Mean Absolute Deviation (MAD) = Sum (Abs errors) / No. of periods

Sales Forecast deviation - SCM Implications [2-45]

One way to deal with forecast error is to reduce reliance of forecasts, especially long-term forecasts.

S2: Demand Management17 июня 2011 г.

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Tracking signal monitors any forecasts that have been made in comparison with actuals, and warns

when there are unexpected departures of the outcomes from the forecasts. Forecasts can relates to

sales, inventory, or anything pertaining to an organization’s future demand.

The tracking signal is a simple indicator that forecast bias is present in the forecast model. It is most

often used when the validity of the forecasting model might be in doubt.

Tracking signal = Σ (at − ft) / MAD

One form of tracking signal is the ratio of the cumulative sum of forecast errors (the deviations between

the estimated forecasts and the actual values) to the mean absolute deviation.[1] The formula for this

tracking signal is:

MAD = Σ|at − ft| / n

where at is the actual value of the quantity being forecast, and ft is the forecast. MAD is the mean

absolute deviation. The formula for the MAD is:

Tracking signal = Σ(at − ft) / Σ|at − ft| / n

where n is the number of periods. Plugging this in, the entire formula for tracking signal is:

Et = βet + (1 − β)Et−1

Mt = β|et| + (1 − β)Mt−1

Another proposed tracking signal was developed by Trigg (1964). In this model, et is the observed error

in period t and |et| is the absolute value of the observed error. The smoothed values of the error and

the absolute error are given by:

Tt = |Et / Mt|

Then the tracking signal is the ratio:

If no significant bias is present in the forecast, then the smoothed error Et should be small compared to

the smoothed absolute error Mt. Therefore, a large tracking signal value indicates a bias in the forecast.

For example, with a β of 0.1, a value of Tt greater than .51 indicates nonrandom errors. The tracking

signal also can be used directly as a variable smoothing constant.[2]

There have also been proposed methods for adjusting the smoothing constants used in forecasting

methods based on some measure of prior performance of the forecasting model. One such approach is

suggested by Trigg and Leach (1967), which requires the calculation of the tracking signal. The tracking

signal is then used as the value of the smoothing constant for the next forecast. The idea is that when

the tracking signal is large, it suggests that the time series has undergone a shift; a larger value of the

smoothing constant should be more responsive to a sudden shift in the underlying signal.Pasted from <http://en.wikipedia.org/wiki/Tracking_signal>

Tracking signal = Mean Deviation / MAD,

MD <>0 means that bias is presentTracking signal16 сентября 2011 г.

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Manufacturing Planning and Control

Business Planning

Sales & Operations

Planning

Master Scheduling

Material

Requirements

Planning (MRP)

Production Activity

Control (PAC)

Resource Planning

(RP)

Rough-Cut

Capacity Planning

(RCCP)

Input/Output

Control

Operation

Sequencing

Capacity

Requirements

Planning (CRP)

Execution

Strategic Planning

Production Planning - setting level of manufacturing output to best satisfy currently planned sales while

meeting other BP objectives.

Master Planning = Priority planning - the function of

determining what material is needed and when;1.

maintaining proper due dates for required materials.2.

S&OP Planning develops plans for products at family level for 1 to 3 years.

S&OP Planning translates the strategic business plan into production rates (PP)that meet company goals.

S&OP Planning includes:

demand management;•

production and resource planning.•

RP - capacity process run at S&OP planning Stage (also at BP level, pg. 3-59).

RP: plans resource availability for PP based on average usage for product families.

Determine the bill of potentially constraining resources for each product family in the production plan1.

Determine the UOM for each resource2.

Determine the resource capacity availability for each resource in each period3.

Calculate the load on each resource in each period4.

Compare the load to the available capacity5.

Take action to revise the production plan, or adjust capacity where loading problems occur6.

S3: [pic] Master Planning and Control22 июня 2011 г.

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Master Scheduling Purpose:

Disaggregate PP at the product family level to the end item level•

Create priority plan (due dates and quantities) for end item manufacturing•

Basis for calculating RCCP•

Drive material requirements plan•

Item S&OP Master Scheduling

Objective Supply Rate by Product Family Anticipated Build Schedule

Item Planned Product Family End Item or Planning BOM

Planning

Horizon

Longest Lead Time Resource Plant and

Equipment

Longest Cumulative Lead Time for End

Items

Constraints Resource Capacity Critical Workcenters

Time Periods monthly weekly or daily

Planning Focus Product volume Product mix

Process Output Production Plan Master Production Schedule

4 steps to create Master Schedule

Preliminary MS for individual end items,1.

Aggregation of individual MS,2.

RCCP,3.

Resolve differences between req. and available capacity.4.

RCCP: validates resources availability for MPS at work centers level to produce end items (usually using

weekly time buckets). [5-27]

Key resources: labor, machinery, WH space, supplier's capabilities

Resource Planning vs. Rough-Cut Capacity Planning [MPR, 7-48]

RP RCCP

Validates… Production Plan Production Schedule

Time basis monthly daily/weekly

Controls all potentially constraining resources for identified critical workcenters

Horizon medium- to long-term short- to medium-term

Input/output control

The objective of input/output control is to balance the flow of work by monitoring and controlling the input

to and output from the work centers.

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Layered approach to planning

Process Level Horizon

Business

Planning

Sales volume ($) 2 to 10 years

S&OP

Planning

Family level 1 to 3 years

Master

Scheduling

End item level 3 to 18

months

MRP Component items below

the end-item level

longest lead-

time

Layered approach to planning4 марта 2012 г.

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Production Strategies [3-13]

Chase (demand

matching)

Production = Demand Stable inventory

JIT production

Capacity at max demand

level required

Workforce issues

Level Production = Average Demand Optimal

manufacturing

costs

High inventory

Requires accurate sales

forecast

Subcontracting Production on minimum Demand level Low inventory May be more expensive

than in-house production

Hybrid combines the aspects of both the

chase and level production planning

methods

Production Strategies22 июня 2011 г.

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Master Production Schedule (MPS) is 1 line from in Master Schedule that shows production volume

[3-41].

Master Schedule example

Available-to-promise (ATP) - uncommitted portion of inventory and planned production [3-55].

For Period 1 = Inventory

Calculated for each period where MPS receipt is scheduled. (All orders until the next receipt are

counted).

Master Schedule23 июня 2011 г.

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Term Definition

BOM List of the components necessary to build an end product

Planning BOM Material requirements for average product in a family [4-23]

Artificial grouping of BOM items used to facilitate Master Scheduling and Material

Planning

Where-Used Inversion of BOM [4-25]

Pegging Shows relationship of material demand back to the parent causing it [4-25]

Lead time the time it takes to make or receive the component [4-31]

Offsetting the process of determining when a planned order release is needed in advance of

the planned order receipt date

Exploding the process of determining the total of each component needed for a parent

Planned Order generated automatically by planning software when it encounters net

requirements (when PAB falls below SS ).

Planned Orders generate planned order receipts.

Firm Planned Order Planned order that has been frozen in quantity and time.

Fixed by the master scheduler and cannot be changed by the system.

The master scheduler has the responsibility to manage firm planned orders.

A tool that allows the planner to override the logic of MRP system.

Released Order A firm commitment: production or purchase order.

Once released, a planned order becomes an Open Order.

It appears as Scheduled Receipt at due date.

Open Order =Released order

Planned Order

Receipt

The quantity planned to be received at a future date as a result of a Planned

Order Release [4-61]

Scheduled Receipt Open Order that has assigned due date.

MRP - Material Requirements PlanningS4: MRP Definitions28 июля 2011 г.

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Line Time Notes

Gross requirements Week 1 Week 2 ... required at the beginning of the period

Scheduled receipts available at the beginning of the period

Projected Available

Balance (PAB)

projected available balance at the end of the period

Net requirements required at the beginning of the period

Net requirement = Gross requirements - On-hand

Inventory - Scheduled Receipt

= неудовлетворенный спрос

Если Net requirement > 0, to PAB упадет ниже 0.

Planned order receipt available at the beginning of the period

Planned order release available at the beginning of the period

Intersection of a source of MPS requirement with a time period is called a time bucket [from Q&A]

MRP Record28 июля 2011 г.

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Production Activity Control [5-40]

Capacity PlanningP

riority Planning

Manufacturing Lead Time [5-30]

Queue

(Backlog)

Setup Run Wait Move

- // - Operation

time

- * - Interoperation

time

- // -

The queue time can comprise 95% or manufacturing lead time. [DSP 6-25]

However Interoperation time is most elastic.

Load [5-29]

Load - Demand on resources

The following steps result in the calculation of load per period at each work center:

Component requirement are generated by MRP: planned and released order quantities and due dates;•

Component requirements are converted into operation time required at each work center.•

Production Activity Control objectives: [5-41]

Execute MPS and MRP•

Optimize use of resources•

Minimize WIP (work in progress)•

Maintain customer service•

Input/output control

The objective of input/output control is to balance the flow of work by monitoring and controlling the

input to and output from the work centers.

I/O report compares what occurs at a work center against what was planned, manages queues and lead-

times.

S5: Capacity Management and Production Activity Control7 августа 2011 г.

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Term Definition

Utilization = Hours actually worked / Available hours

Efficiency = Standard hours of work produced / Hours actually worked

Rated Capacity = Available time * Utilization * Efficiency [standard hours]

Operation time per piece = Setup time + Run time (per routing or work center file)

Operation time per order = order quantity * operation time per piece

[DSP, 6-37]

Available time The number of hours a work center can be used

Maximum

demonstrated

capacity

The highest amount of actual output produced in the past when all efforts

have been made to optimize the resource

Capacity available The capability of a system or resource to produce a quantity of output in a

particular time period

Theoretical capacity The maximum output capacity, allowing no adjustments for preventive

maintenance, unplanned downtime, shutdown, etc.

Demonstrated

capacity

proven capability calculated from actual performance data and expressed in

standard hours

Rated capacity = Theoretical capacity * Utilization * Efficiency

Productive capacity The maximum of the output capabilities of a resource

OR

the market demand for that output for a given time period

Protective capacity quantifiable capacity that is, or can be made available, at a nonconstraint

work center that contributes to protection (against idle time) of the

constraint.

Safety capacity quantifiable capacity that is available over and above productive capacity

that includes an allowance for planned events, maintenance, as well as

unplanned events. It includes protective capacity.

Excess capacity output capability at a nonconstraint work center that exceeds productive

and protective capacity

Idle capacity generally not used capacity including protective and excess capacity

Activation the use of nonconstraint resources to produce above the rate required by

the system constraint

Capacity Terms & Calculation7 августа 2011 г.

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Data requirements [5-29]

Data Source

Open shop orders Shop order file

Planner order releases MRP

Where work is done Routing file

Time needed (st. hours) Routing file

Lead times Routing file or Work center file

Work center capacity Work center file

Routing Data [DSP, 6-27]

Operation number (for sequencing)

Operation description

Planned work center

Standard setup times

Additional data for sequence-dependent setups F.i., changeover matrix

Standard run time per unit, quantity, or batch

Tooling

Information flow8 августа 2011 г.

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Priority control establishing sequence in which orders are to be

run (at each workstation).

[5-65]

Dispatching selecting and sequencing of available jobs to be

run at individual workstations and the

assignment of these jobs to workers

APICS Dictionary

Dispatching process of translating production plan into

output (action)

(http://www.transtutors.com/homework-

help/industrial-management/production-

planning-and-control/dispatching.aspx)

Dispatching rules [5-65]

First come, first served (FCFS)

Earliest job due date (EDD)

Earliest operation due date (ODD)

Shortest process time (SPT)

Critical ratio (CR) CR = time to due date / work remaining

In case CR < 1 the order will be late.

Lowest CR orders are run first.

Dispatching & Priority Control9 августа 2011 г.

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Inventory - stocks or items used for:

Production RM, WIP

Operations Maintenance, Repair, Operating supplies (MRO)

Customer service FG, repair parts, spares

Aggregate Inventory Management objectives:

Support business strategy and operations•

Ensure that inventory management supports financial objectives•

Balance customer service, operations efficiency, and inventory investment cost objectives•

or, shortly [7-7]

to provide SL•

to minimize the sum of all costs involved•

Operating Efficiency [6-17]

Inventory can make manufacturing operations more productive

Dealing seasons demand with load leveling by building up

anticipation inventory during periods of low demand

Reduces changeover costs

Allowing inventory to build up enables longer production runs Distributes setup costs over a larger

quantity of products

Higher purchasing quantities Taking advantage of discounts and

lower order costs per unit.

Functions of Inventory [6-15]

Anticipation inventory is build up in advance of future demand, such as a peak selling season,

or production shutdown

Safety stock

(Fluctuation inventory)

covers random fluctuation in supply, demand, and lead time.

Prevents or reduces the probability of stockout.

Lot-size inventory (Cycle stock) consists of items purchased or manufactured in lot-size quantity

greater than needed.

Transportation inventory

(pipeline stock)

in transit in the distribution network

Hedge inventory buildup to buffer against some event that may not happen

f.i.: expected price increase at the market

Buffer - A quantity of materials awaiting further processing.

Inventory costs [6-21]

Item costs

Carrying costs = Capital + Storage + Risks

Ordering costs Factory orders: [6-25]

Production control costs•

Setup and teardown costs•

Lost capacity costs•

Purchase orders: Purchasing costs

Stockout costs Backorder costs•

Lost sales•

Lost customers•

Capacity-related

costs

Result from changing production levels and very with the number of changes:

[6-29]

S6: Aggregate Inventory Management9 августа 2011 г.

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costs [6-29]

Overtime•

Hiring/layoff•

Training•

These costs can be minimized by leveling production.

BSC Page 19

Balance Sheet [6-33]

Account Description Examples

Assets Items of value to the

company

Cash, inventory, machinery, buildings, accounts receivable

(AR), patents

Liabilities Obligations of the

business

Accounts payable (AP), wages payable, long and short-term

debt

Owner's

equity

Net worth of business = Assets - Liabilities

Income Statement [6-33]

Account Description Examples

Revenue Income from sales of goods and

services

Cash, accounts receivable

Expense Cost of goods sold Direct labor, direct materials, and factory

overheads

Expense General and administrative expenses All other costs: advertising, taxes, wages

Performance Measures [6-45]

Inventory Turns (Turnover) = COGS / Avg Inventory

Days of supply (DOS) = Inventory on hand / Avg daily usage

Financial Inventory9 августа 2011 г.

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Lot-size decision rules [7-9]

Lot-for-lot Items are ordered in amounts necessary, when they

are needed

F.i., dependent demand items.

Used for A-items (expensive)

Fixed order quantity The same amount each time even if it exceeds what

is needed; interval between orders may vary

Easy to implement

Economic order quantity (EOQ) see below

Order n periods of supply Used for C-items (inexpensive)

Part period balancing (PPB)

[APICS Dictionary]

A dynamic lot-sizing technique that uses the same

logic as the least total cost method, but adds a

routine called look ahead/look back.

When the look ahead/look back feature is used, a lot

quantity is calculated, and before it is firmed up, the

next or the previous period’s demands are evaluated

to determine whether it would be economical to

include them in the current lot.

See: discrete order quantity, dynamic lot sizing.

Wagner-Whitin algorithm

[APICS Dictionary]

A mathematically complex, dynamic lot-sizing

technique that evaluates all possible ways of

ordering to cover net requirements in each period of

the planning horizon to arrive at the theoretically

optimum ordering strategy for the entire net

requirements schedule.

See: discrete order quantity, dynamic lot sizing.

Cost to carry inventory

Storage facility cost•

Counting, transporting, and handling•

Risk of obsolescence•

Insurance and taxes•

Risk of loss•

Opportunity costs•

EOQ [7-13], [MM p. 80]

EOQ model manages the tradeoff between ordering cost and inventory carrying cost.

EOQ point is reached when Ordering costs = Carrying costs [7-21].

Q order (lot) size (Q/2 - average inventory level)

с cost per unit of inventory

i annual carrying cost rate

A annual demand (MA: any other period can be taken as well)

S ordering cost (per 1 order)

EOQ = (2 * Demand * Cost Per Order / inventory carrying cost / Inventory unit cost) 1/2

Order Quantity Constraints

Minimum quantity can be used to meet a supplier minimum

Maximum quantity can be set to recognize storage or transportation limits

Minimum monetary value can be used to order at least a supplier- or purchasing-established minimum

purchase order charge

Maximum monetary value can be used to limit inventory investment levels

Minimum days’ supply can be used to prevent multiple orders for the same period

S7: Item Inventory Management9 августа 2011 г.

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Minimum days’ supply can be used to prevent multiple orders for the same period

Maximum day’s supply is used to support inventory turns and targets, and to recognize shelf-life constraints

Service Levels [7-39], [MM p. 86]

The costs of stockout, all of which are difficult to calculate precisely, include:

Backorder costs•

Lost sales•

Lost customers•

Safety Factors [7-41], [MM p. 86], [DSP 2-17]

Desired Service Level % σ Safety Factor the Safety Factor

50% 0 0

80% 0.84 1.05

90% 1.28 1.60

95% 1.65 2.06

98% 2.05 2.56

Safety Stock = MAD Safety Factor * MAD [7-40]

1 σ of SS = 84% customer service.

The method taken from Materials Management by Arnold/Chapman .

Here Service Level is linked to σ.

Note that the service level is the percentage of order cycles without a

stockout.

BSC Page 22

The reorder point (ROP) is the level of inventory when an order should be made with suppliers to bring

the inventory up by the Economic order quantity ("EOQ").

Order point [7-29]

Order point = Demand during lead time + Safety Stock

OP = DDLT + SS

Target inventory level (max stock) = Demand (Review period + Lead time) + SS

The next several demand periods are estimated (not average of all known demand).

Determining when the Order Point is reached [7-43], [MM p. 87]

Имеется в виду способ физического учета.

Two-bin

system

A quantity of an item equal to the order point quantity is set

aside and not touched until all the main stock is used up.

When this stock needs to be used, the production control or

purchasing department is notified and a replenishment order

is placed.

Used for C-items, which

are not expensive and it

is best to spend min.

time and money

controlling them.

Perpetual

inventory

record

system

A perpetual inventory record is a continual account of

inventory transaction as they occur. At any instant, it holds an

up-to-date record of transactions. At a minimum, it contains

the balance on hand, but it may also contain the quantity on

order but not received, the quantity allocated but not issue

and the available balance.

Ex.: SAP system

Kanban Lean/JIT method that uses a signal (see S9).

Order systems [7-47], [MM p. 88]

Characteristic Order Point system Periodic Review system (Fixed-interval order system)

Interval between orders Variable Fixed

Order quantity Fixed Variable

ABC Inventory Control [7-55], [MM p. 76]

Based on Pareto's Law.

Possible ABC characteristics:

Annual usage (amount)•

Scarcity of material•

Quality problems•

Auditing Inventory Records [7-65], [DSP 2-39]

Periodic

Inventory

Inventory counts are

performed at some recurring

interval

Period for different items can be determined using ABC

system

Cycle

Counting

Occurs continuously, with a

few items counted each day

by trained employees

Continuous counting and evaluation with objective to

improve the processes that affect inventory accuracy (and

ultimately customer service)

The Cycle Counting Process [2-39a]

Process/Procedures how

Education/Training responsible personnel

Accountability/Responsibility What to do when a discrepancy is found

Order point14 сентября 2011 г.

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Cycle Counting Options [2-41]

ABC Classification A items should be counted more frequently than B and C items

At a reorder point Assuming that inventory level will be low and there be a smaller qty

to count

When a replenishment lot is

received

When remaining stock is minimum

At zero balance When remaining stock is minimum

At negative balance which indicates error

After a set # of transactions

BSC Page 24

Types of purchased items [8-7]

RM and components Are consumed during the production process

Capital items Includes equipment and technology

MRO Used in general operations and maintenance

Services Activities that support the production or distribution functions

Purchasing Cycle [8-23]

Generate requisition

(PR)

A need for an item may be identified by a user, an MRP system, or a purchase

plan

Issue PO Purchasing reviews PR and selects a supplier.

PO includes: quantity, part number, delivery date, etc.

Follow up PO tracking

Receive goods

Approve payment Once goods are received and accepted, payment is approved.

PO is closed.

Types of sourcing [8-15]

Sole S. Only one supplier, no alternative

suppliers exist

Not ideal, however unavoidable if the goods are

unique

Single S. One active supplier, but other

suppliers are available

The purpose is to focus on a long-term relationship

with a single partner

Multiple

S.

More than one supplier Reduces risks of unavailability, can lower costs

through competition

Distribution Inventory Planning Systems [8-43]

System Characteristic Advantages Disadvantages

Pull Decentralized system Each center acts

independently

Demand data may be

more timely and accurate

Lack of coordination

Risk of low SL

Disrupted factory

schedules

Push Centralized system; based on

centrally made forecast

Coordination within the

system

Not fully responsive to

local developments

Distribution

requirements

planning (DRP)

Collaboration between

Distribution Center (DC), central

supply, and the factory.

The marketing mix is made up of product, promotion, price and place and the latter is created by

physical distribution. [MM p. 101]

S8: Purchasing and Physical Distribution18 августа 2011 г.

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Service functions of Warehouses [MM p. 107]

Type Storage time Activities Purpose

General WH long period min. operations Protect goods until they are

needed

F.i., anticipation inventory

Distribution

WH

brief Focus on movement and handling Movement and mixing

Role of Warehouses [MM p. 108] [8-71]

Transportation

consolidation

Reduce transportation costs by receiving consolidated shipments in truckload (TL)

quantities and breaking them down into shipments of same or mixed products for

further distribution ( TL -> LTL) and vice versa (LTL -> TL) when purchasing from

suppliers.

Product mixing Mixing of products that are produced at different location (received in different

loads)

Service Provide better delivery times and reliability to customers by being close to the

market

Warehouse Process [8-71]

Warehousing18 августа 2011 г.

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Physical distribution activities - affect customer service level and the cost of providing it. [MM pg. 100]

Transportation typically the largest component (30-60%)

Transportation adds place value to the product.

Distribution inventory includes all FG at any point in the distribution system

second most important item (25-30%)

Inventory create time value by placing product close to the

customer.

Warehouses (DC) Storage of inventory

Material handling

Protective packaging

Order processing [and

communication]

Transportation costs Depend on...

Line-haul c. distance moved

Pickup and delivery c. pickups number, weight moved

Terminal handling c. number of operations (number of times a shipment is handled, loaded, and

unloaded)

Billing and collecting c.

(paperwork)

number of shipments

Line-haul costs (LHC) include: [8-67]

fuel•

wages•

wear and tear of the vehicles•

Distribution14 сентября 2011 г.

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Laid-down cost (LDC) is the delivered cost of product to a particular geographic point. [MM p. 109]

LDC =ProductCosts +TransportationPerKm * DistanceKm.

Market boundary. The market boundary is the line between 2 or more supply sources where the laid-

down cost is the same.

Market boundaries19 января 2012 г.

10:42

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Product and Quality Cycle [9-7]

Step Location Quality management system objectives (Ensure quality of …)

Product Definition Marketplace Market

Tangible and intangible characteristics

Price

Estimate of sales volume [MA: incorrect sales volume forecast means low

quality of Product Definition]

Voice of the customer is valuable for this process

Product Design Create product specs, performance requirements, materials, dimensions,

tolerances

Product

Manufacturing

Manufacturing must make the product to the specifications

Product Consumption

(Use)

Marketplace Customer satisfaction through value to the customer:

Performance (fitness-for-use) - primary characteristics (to the customer)•

Features - secondary characteristics•

Conformance - standards and government regulations•

Warranty•

Definitions [9-9]

Lean/JIT minimizing activities that do not add value to the customer (value chain)

Quality

management

systems (QMS)

system that documents the structure, responsibilities, and procedures required to achieve

effective quality management

Total quality

management (TQM)

A never-ending process to improve everything an organization does to satisfy customers.

Continuous improvement is necessary because of the competition.

MA: No competition = Monopoly = No improvements

Quality function

deployment (QFD)

methodology designed to ensure that all the major requirements of the customer are

identified and met or exceeded (House of Quality)

Quality at the source A system that eliminates the need for incoming inspection by the customer.

Example: a producer's responsibility to provide 100% acceptable quality material to the

consumer. [9-65]

Employee

Involvement (EI)

Using experience, creative energy, and intelligence of all employees be treating them with

respect, keeping them informed, and including them and their ideas in decision-making

process [9-31]

Employee

Empowerment

Giving nonmanagerial employees the responsibility and the power to make decisions

regarding their jobs of tasks

делегирующий стиль руководства

Statistical Process

Control (SPC)

Application of statistical techniques, such as control charts, to monitor and adjust an

operation [9-49].

SPC is used to look for trends and can spot changes in variation that may be due to

problems in processes.

Total Productive

Maintenance

Preventive maintenance plus continuing efforts to adapt, modify, and refine equipment to

increase flexibility, reduce material handling, and promote continuous flows [9-27]

Supplier Partnership The establishment of a working relationship with a supplier organization whereby two

organizations act as one.

QMS Principles, Practices, and Tools [9-10]

Practice/Tool Define Design Manufacture Consume

Customer Focus/Value x x x x

Quality function deployment (QFD) x x x

Eliminate Waste x x x

S9: Lean/JIT and Quality Systems1 сентября 2011 г.

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Eliminate Waste x x x

Work cells x

Total Productive Maintenance x

Employee Focus x x x x

Supplier Partnership x x x x

Quality-Related Costs x x x

Statistical Process Control x x

Quality Tools x x

Six sigma x x x x

Customer Focus [9-13]

Customers have requirements to their suppliers:

High quality level•

High flexibility (volume, specifications, delivery)•

High service level•

Short lead time•

Low variability in meeting targets•

Low cost•

QFD uses a structured process "House of Quality" [9-14]

Identify customer requirements <- The Voice of the

Customer

Identify supporting technical design requirements

Compare the customer requirements to the technical design requirements and assign

relationship ratings

Assign importance to the customer requirements

Evaluate competitors

Identify technical features to be deployed in the final design of the product

Waste [9-19]

Process Taking unneeded steps; inefficiencies

Movement (transportation) Moving products unnecessarily

Methods (motion) Wasted time/efforts by operators (MA: or other employees)

Product defects Products and service that do not meet specifications

Waiting time Queuing delays

Overproduction Making more product that required

Excess inventory Holding stock not required to fulfill customer orders

Unused people skills Waste of knowledge or capabilities

Quality-Related Costs [9-41]

Costs related to making defect-free products:

Costs of Failure Internal The cost of correcting problems while the

goods are still in the production facility

Rework, spoilage

External …after the goods or services have been

delivered to the customer

Filed service, warranty

Costs of Controlling

Quality

Prevention The costs of preventing problems from

occurring

Design improvements,

statistical process control

Appraisal … of checking and auditing quality Quality inspections,

calibrations and testing

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Quality Control Tools [9-43]

Flowchart visualizes the sequence of steps

Cause and effect fishbone

Control charts A graphical comparison of process performance data with control limits [9-65]

Check sheet Summarizes count of different type of event occurrences

Histogram Shows events by frequency

Pareto Tool for ranking causes from most to least significant

Scatter diagram Used to analyze relationship between two variables

Lean production 5S system is design to create a visual workspace.

Sort All unneeded tools, parts and supplies are removed for the area

Set in Order A place for everything and everything is in its place

Shine The area is cleaned as the work is performed

Standardize Cleaning and identification methods are consistently applied

Sustain 5S is a habit and is continually improved

Pasted from <http://www.tocforme.com/mainlean.html>

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Six sigma - Set of concepts and practices that focus on reducing variation in processes. [9-57]

Sigma = standard deviation

Six sigma is about problem solving and improving all business processes. It is build on 3 major concepts:

Understand what the customer wants•

Variation causes defects•

The quality of the output of a process is a function of the variation in the process•

Causes of Variation [9-59]

Variation causes defects. Therefore, it is important to identify the types of variation.

Special cause Sources of variation that can be isolated and are assignable to a particular source.

Operator error, broken equipment, emergency power shut down, etc.

Common cause ... that are inherent in a process

Phases of Six Sigma project: DMAIC [9-61]

Define Identify the customer's problems and the processes

Quantify improvement goals along with potential benefits

Measure All the data necessary to understand the process

Analyze Determine the cause and effect relationships that produce the variation of waste

Improve Develop and implement solutions

Control Ensure that the gains are maintained

Six Sigma8 сентября 2011 г.

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Kanbans maintain inventory levels; a signal is sent to produce and deliver a new shipment as material is

consumed. These signals are tracked through the replenishment cycle and bring extraordinary visibility

to suppliers and buyers.[1]

Kanban (看板?), also spelled kamban, and literally meaning "signboard" or "billboard", is a concept

related to lean and just-in-time (JIT) production. According to Taiichi Ohno, the man credited with

developing Just-in-time, kanban is one means through which JIT is achieved.[2][3]

Kanban is not an inventory control system. Rather, it is a scheduling system that tells you what to

produce, when to produce it, and how much to produce.

The need to maintain a high rate of improvements led Toyota to devise the kanban system. Kanban

became an effective tool to support the running of the production system as a whole. In addition, it

proved to be an excellent way for promoting improvements because reducing the number of kanban in

circulation highlighted problem areas.[4]

Contents[hide]

1 Origins•

2 Operation•

2.1 Kanban cards•

2.2 Toyota's six rules•

2.3 Three-bin system•

3 Electronic kanban systems•

4 See also•

5 References•

6 Further reading•

7 External links•

OriginsIn the late 1940s, Toyota began studying supermarkets with a view to applying store and shelf-stocking

techniques to the factory floor, based on the idea that in a supermarket, customers get what they need

at the needed time, and in the needed amount. Furthermore, the supermarket only stocks what it

believes it will sell, and customers only take what they need because future supply is assured. This led

Toyota to view a process as being a customer of preceding processes, and the preceding processes as a

kind of store. The customer process goes to this store to get needed components, and the store

restocks. Originally, as in supermarkets, signboards were used to guide "shopper" processes to specific

restocking locations.

"Kanban" uses the rate of demand to control the rate of production, passing demand from the end

customer up through the chain of customer-store processes. In 1953, Toyota applied this logic in their

main plant machine shop.[5]

OperationAn important determinant of the success of production scheduling based on "pushing" the demand is

the quality of the demand forecast that can receive such "push."

Kanban, by contrast, is part of an approach of receiving the "pull" from the demand. Therefore, the

supply or production is determined according to the actual demand of the customers. In contexts where

supply time is lengthy and demand is difficult to forecast, the best one can do is to respond quickly to

observed demand. This is exactly what a kanban system can help with: It is used as a demand signal that

immediately propagates through the supply chain. This can be used to ensure that intermediate stocks

held in the supply chain are better managed, usually smaller. Where the supply response cannot be

quick enough to meet actual demand fluctuations, causing significant lost sales, then stock building may

be deemed as appropriate which can be achieved by issuing more kanban. Taiichi Ohno states that to be

effective kanban must follow strict rules of use[6] (Toyota, for example, has six simple rules, below) and

that close monitoring of these rules is a never-ending task to ensure that the kanban does what is

required.

Number of kanbans means inventory in circulation.Kanban5 сентября 2011 г.

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Kanban cardsKanban cards are a key component of Kanban that utilizes cards to signal the need to move materials

within a manufacturing or production facility or move materials from an outside supplier to the

production facility.

The Kanban card is, in effect, a message that signals depletion of product, parts or inventory that when

received will trigger the replenishment of that product, part or inventory. Consumption drives demand

for more. Demand for more is signaled by Kanban card. Kanban cards thus, in effect, help to create a

demand-driven system. It is widely espoused by proponents of Lean production and manufacturing that

demand-driven systems lead to faster turnarounds in production and lower inventory levels, helping

companies implementing such systems to be more competitive.

Kanban cards, in keeping with the principles of Kanban, should simply convey the need for more

materials. A red card lying in an empty parts cart would easily convey to whomever it would concern

that more parts are needed.

In the last few years, Electronic Kanban systems, which send Kanban signals electronically, have become

more widespread. While this is leading to a reduction in the use of Kanban cards in aggregate, it is

common in modern Lean production facilities to still find widespread usage of Kanban cards.

Toyota's six rulesDo not send defective products to the subsequent process•

The subsequent process comes to withdraw only what is needed•

Produce only the exact quantity withdrawn by the subsequent process•

Level the production•

Kanban is a means to fine tuning•

Stabilize and rationalize the process•

Three-bin systemA simple example of the kanban system implementation might be a "three-bin system" for the supplied

parts (where there is no in-house manufacturing) — one bin on the factory floor (demand point), one

bin in the factory store, and one bin at the suppliers' store. The bins usually have a removable card that

contains the product details and other relevant information — the kanban card.

When the bin on the factory floor becomes empty, i.e., there is demand for parts, the empty bin and

kanban cards are returned to the factory store. The factory store then replaces the bin on the factory

floor with a full bin, which also contains a kanban card. The factory store then contacts the supplier’s

store and returns the now-empty bin with its kanban card. The supplier's inbound product bin with its

kanban card is then delivered into the factory store completing the final step to the system. Thus the

process will never run out of product and could be described as a loop, providing the exact amount

required, with only one spare so there will never be an oversupply. This 'spare' bin allows for the

uncertainty in supply, use and transport that are inherent in the system. The secret to a good kanban

system is to calculate how many kanban cards are required for each product. Most factories using

kanban use the coloured board system (Heijunka Box). This consists of a board created especially for

holding the kanban cards.

Electronic kanban systemsMain article: Electronic kanban

Many manufacturers have implemented electronic kanban systems.[7] Electronic kanban systems, or E-

Kanban systems, help to eliminate common problems such as manual entry errors and lost cards.[8] E-

Kanban systems can be integrated into enterprise resource planning (ERP) systems. Integrating E-

Kanban systems into ERP systems allows for real-time demand signaling across the supply chain and

improved visibility. Data pulled from E-Kanban systems can be used to optimize inventory levels by

better tracking supplier lead and replenishment times.[9]

Pasted from <http://en.wikipedia.org/wiki/Kanban>

BSC Page 34

TOC Holistic management philosophy that is based on the principle that complex systems exhibit

inherent simplicity.

TOC is based on the premise that the rate of goal achievement is limited by at least one constraining

process. Only by increasing flow through the constraint can overall throughput be increased.

TOC deems that constrains determine system performance

Types of Constraints [10-9]

Throughput-based C. Internal physical resource constraints: machine, supplier, skills.•

External market c.: insufficient demand for the product/service•

Behavior-based C. Lack of understanding of the causes and effects of problems•

Not knowing where to start making the improvement•

True bottleneck resource whose capacity is less than of equal to the demand [10-9]

Capacity-constrained

resource (CCR)

Any resource that is likely to compromise the throughput of organization if

its capacity is not carefully managed.

VATI analysis [10-11]

V-type basic raw material; range of products Wood

furniture

A-type Converging operations: multiple RM, components end up in a final product Jet engine

T-type Number of basic units are configured into many end products during the final

assembly stage

Computers

X-type Subset of T-type: high number of RM/components, low # of subassemlies, high #

of final assemblies or configurations [MPR 1-20]

Computers

I-type Linear product flow: same operations that produce many different products Packaged

food

Throughput Accounting

Goal of operations is to make money.

Making money can be broken down to 3 measurable quantities: T, I, OE

TOC relies on 3 global measures that are applied in a structured approach for the business decisions

[10-29]:

Throughput (T) T = Sales Revenue - True Variable Cost

(or Cost of RM)

Value is recognized only when

something is sold (not when it is

made).

Will it increase sales revenue so that

monetary value of T will increase?

Investment (includes

inventory) (I)

Impact in I?

Operating expense

(OE)

Will it reduce OE?

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Five focusing steps [10-19]

Step 1: Identify the C. Compares all system components against market

requirements

Step 2: Exploit the C. Use constraint to its maximum capability

Step 3: Subordinate everything else to the

C.

DBR method

Step 4: Elevate the C.

Step 5: Start Over

Drum The schedule of CCR

Rope Communication system between the Drum and the release of materials (input of the system).

The rope controls the time buffer between input and CCR.

Buffer management is a key control mechanism that allows the CCR and shipping to stay on schedule.

Time (constraint) buffer Lead time with some safety built into it.

Stock buffer Safety time in time buffer leads to WIP in front of the CCR and Shipping

(output).

Protective capacity Idle capacity is maintained as a safeguard against unexpected events.

Critical Chain Method assumes that it takes strategic buffering at high-risk control points and prevent

delays and ultimately protect (minimize) manufacturing lead time [10-31]

Completion buffer at the end of production•

Constraint buffers at the CCR•

Feeding buffer on resources that feed into the critical chain.•

Buffer zones

Red zone Expedite Missing orders need to be expedited immediately.

If <5% or work is expedited, the buffer if too big.

If >5% or work is expedited, the buffer if too small.

Yellow

zone

Monitor Coordination is needed to make sure that missing order arrive at the Red

zone on time.

Green zone Don’t

worry

Keep track of missing orders but there is no urgency required.

Simplified Drum-Buffer-Rope (S-DBR, SDBR) is used when the constraint is no longer internal (f.i.,

market).

Simplified drum-buffer-rope is an excellent reminder to heed the 5th step of the 5 focusing steps; don’t

allow inertia to become a system constraint. When most drum-buffer-rope implementations move the

constraint into the market, they continue to protect the internal process, at very the least, at 2 places,

the internal weakest link or control point, and the shipping date. Do we still need to do this? The

answer appears to be no when the internal weakest link is working at 80% or less of its capacity to

supply the market demand. In this situation it is quite safe to roll the safety up into one global safety

buffer instead of two or more.

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buffer instead of two or more.

How do we schedule such a system?

Well, instead of having a constraint schedule and a shipping schedule we now have only a shipping

schedule with a gating process off-set by a full shipping rope length. The schedule is still loaded against

the capacity of the internal constraint – available hours per day, or available hours per week, over the

average manufacturing lead time, but the only detailed schedule is for shipping. More correctly the

schedule is loaded against up to 80% of the aggregate capacity of the internal control point. A queue of

some duration will still naturally build and maintain itself in front of the weakest link, but it is no longer

scheduled.

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The title Theory of Constraints (TOC) adopts the common idiom "A chain is no stronger than its weakest

link" as a new management paradigm. This means that processes, organisations, etc., are vulnerable

because the weakest person or part can always damage or break them or at least adversely affect the

outcome.

The analytic approach with TOC comes from the contention that any manageable system is limited in

achieving more of its goals by a very small number of constraints, and that there is always at least one

constraint. Hence the TOC process seeks to identify the constraint and restructure the rest of the

organization around it, through the use of Five Focusing Steps.

1.1 Key assumption○

1.2 The five focusing steps○

1.3 Constraints○

1.4 Buffers○

1.5 Plant types○

1 History•

2.1 Operations○

2.2 Supply chain / logistics○

2.3 Finance and accounting○

2.4 Project management○

2.5 Marketing and sales○

2 Applications•

3 The TOC thinking processes•

4 Development and practice•

5.1 Claimed Suboptimality of Drum-Buffer-Rope○

5.2 Unacknowledged debt○

5 Criticism•

6 See also•

7 References•

8 Further reading•

9 External links•

Contents

HistoryTheory of Constraints (TOC) is an overall management philosophy introduced by Dr. Eliyahu M. Goldratt

in his 1984 book titled The Goal, that is geared to help organizations continually achieve their goals.[1]

Dr. Eliyahu M. Goldratt adopted the concept with his book Critical Chain, published 1997. The concept

was extended to TOC with respectively titled publication in 1999.

An earlier propagator of the concept was Prof.h.c. Wolfgang Mewes[2] in Germany with publications on

power-oriented management theory (Machtorientierte Führungstheorie, 1963) and following with his

Energo-Kybernetic System (EKS, 1971), later renamed Engpasskonzentrierte Strategie[3] as a more

advanced theory of bottlenecks. The publications of Wolfgang Mewes are marketed through the FAZ

Verlag, publishing house of the German newspaper Frankfurter Allgemeine Zeitung. However, the

paradigm Theory of constraints was first used by Dr. Eliyahu M. Goldratt.

Key assumptionThe underlying premise of Theory of Constraints is that organizations can be measured and controlled by

variations on three measures: throughput, operational expense, and inventory. Throughput is the rate at

which the system generates money through sales. Inventory is all the money that the system has

invested in purchasing things which it intends to sell. Operational expense is all the money the system

spends in order to turn inventory into throughput.[4]

"The Goal" itself is to "make money". All other benefits are derived, in one way or another, from that

Theory of Constraints8 сентября 2011 г.

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"The Goal" itself is to "make money". All other benefits are derived, in one way or another, from that

single primary goal.

The five focusing stepsTheory of Constraints is based on the premise that the rate of goal achievement is limited by at least

one constraining process. Only by increasing flow through the constraint can overall throughput be

increased.[1]

Identify the constraint (the resource or policy that prevents the organization from obtaining more

of the goal)

1.

Decide how to exploit the constraint (get the most capacity out of the constrained process)2.

Subordinate all other processes to above decision (align the whole system or organization to

support the decision made above)

3.

Elevate the constraint (make other major changes needed to break the constraint)4.

If, as a result of these steps, the constraint has moved, return to Step 1. Don't let inertia become

the constraint.[5]

5.

Assuming the goal of the organization has been articulated (e.g., "Make money now and in the future")

the steps are:

The five focusing steps aim to ensure ongoing improvement efforts are centered around the

organization's constraints. In the TOC literature, this is referred to as the "Process of Ongoing

Improvement" (POOGI).

These focusing steps are the key steps to developing the specific applications mentioned below.

ConstraintsA constraint is anything that prevents the system from achieving more of its goal. There are many ways

that constraints can show up, but a core principle within TOC is that there are not tens or hundreds of

constraints. There is at least one and at most a few in any given system. Constraints can be internal or

external to the system. An internal constraint is in evidence when the market demands more from the

system than it can deliver. If this is the case, then the focus of the organization should be on discovering

that constraint and following the five focusing steps to open it up (and potentially remove it). An

external constraint exists when the system can produce more than the market will bear. If this is the

case, then the organization should focus on mechanisms to create more demand for its products or

services.

Equipment: The way equipment is currently used limits the ability of the system to produce more

salable goods/services.

•

People: Lack of skilled people limits the system. Mental models held by people can cause

behaviour that becomes a constraint.

•

Policy: A written or unwritten policy prevents the system from making more.•

Types of (internal) constraints

The concept of the constraint in Theory of Constraints differs from the constraint that shows up in

mathematical optimization. In TOC, the constraint is used as a focusing mechanism for management of

the system. In optimization, the constraint is written into the mathematical expressions to limit the

scope of the solution (X can be no greater than 5).

Please note: Organizations have many problems with equipment, people, policies, etc. (A breakdown is

just that - a breakdown - and is not a constraint in the true sense of the TOC concept) The constraint is

the thing that is preventing the organization from getting more Throughput (typically, revenue through

sales).

BuffersBuffers are used throughout Theory of Constraints. They often result as part of the EXPLOIT and

SUBORDINATE steps of the five focusing steps. Buffers are placed before the governing constraint, thus

ensuring that the constraint is never starved. Buffers are also placed behind the constraint to prevent

downstream failure to block the constraint's output. Buffers used in this way protect the constraint from

variations in the rest of the system and should allow for normal variation of processing time and the

occasional upset (Murphy) before and behind the constraint.

Buffers can be a bank of physical objects before a work center, waiting to be processed by that work

center. Buffers ultimately buy you time, as in the time before work reaches the constraint and are often

verbalized as time buffers. There should always be enough (but not excessive) work in the time queue

before the constraint and adequate offloading space behind the constraint.

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before the constraint and adequate offloading space behind the constraint.

Buffers are not the small queue of work that sits before every work center in a Kanban system although

it is similar if you regard the assembly line as the governing constraint. A prerequisite in Theory of

Constraints is that with one constraint in the system, all other parts of the system must have sufficient

capacity to keep up with the work at the constraint and to catch up if time was lost. In a balanced line,

as espoused by Kanban, when one work center goes down for a period longer than the buffer allows,

then the entire system must wait until that work center is restored. In a TOC system, the only situation

where work is in danger, is if the constraint is unable to process (either due to malfunction, sickness or a

"hole" in the buffer - if something goes wrong that the time buffer can not protect).

Buffer management therefore represents a crucial attribute of the Theory of Constraints. There are

many ways to do it, but the most often used is a visual system of designating the buffer in three colours:

Green (OK), Yellow (Caution) and Red (Action required). Creating this kind of visibility enables the

system as a whole to align and thus subordinate to the need of the constraint in a holistic manner. This

can also be done daily in a central operations room that is accessible to everybody.

Plant types

I-Plant: Material flows in a sequence, such as in an assembly line. The primary work is done in a

straight sequence of events (one-to-one). The constraint is the slowest operation.

•

A-Plant: The general flow of material is many-to-one, such as in a plant where many sub-

assemblies converge for a final assembly. The primary problem in A-plants is in synchronizing the

converging lines so that each supplies the final assembly point at the right time.

•

V-Plant: The general flow of material is one-to-many, such as a plant that takes one raw material

and can make many final products. Classic examples are meat rendering plants or a steel

manufacturer. The primary problem in V-plants is "robbing" where one operation (A) immediately

after a diverging point "steals" materials meant for the other operation (B). Once the material has

been processed by A, it cannot come back and be run through B without significant rework.

•

T-Plant: The general flow is that of an I-Plant (or has multiple lines), which then splits into many

assemblies (many-to-many). Most manufactured parts are used in multiple assemblies and nearly

all assemblies use multiple parts. Customized devices, such as computers, are good examples. T-

plants suffer from both synchronization problems of A-plants (parts aren't all available for an

assembly) and the robbing problems of V-plants (one assembly steals parts that could have been

used in another).

•

There are four primary types of plants in the TOC lexicon. Draw the flow of material from the bottom of

a page to the top, and you get the four types. They specify the general flow of materials through a

system, and they provide some hints about where to look for typical problems. The four types can be

combined in many ways in larger facilities.

For non-material systems, one can draw the flow of work or the flow of processes and arrive at similar

basic structures. A project, for example is an A-shaped sequence of work, culminating in a delivered

project.

ApplicationsThe focusing steps, or this Process of Ongoing Improvement has been applied to Manufacturing, Project

Management, Supply Chain/Distribution generated specific solutions. Other tools (mainly the "Thinking

Process") also led to TOC applications in the fields of Marketing and Sales, and Finance. The solution as

applied to each of these areas are listed below.

OperationsWithin manufacturing operations and operations management, the solution seeks to pull materials

through the system, rather than push them into the system. The primary methodology use is Drum-

Buffer-Rope (DBR)[6] and a variation called Simplified Drum-Buffer-Rope (S-DBR).[7]

Drum-Buffer-Rope is a manufacturing execution methodology, named for its three components. The

drum is the physical constraint of the plant: the work center or machine or operation that limits the

ability of the entire system to produce more. The rest of the plant follows the beat of the drum. They

make sure the drum has work and that anything the drum has processed does not get wasted.

The buffer protects the drum, so that it always has work flowing to it. Buffers in DBR have time as their

unit of measure, rather than quantity of material. This makes the priority system operate strictly based

on the time an order is expected to be at the drum. Traditional DBR usually calls for buffers at several

points in the system: the constraint, synchronization points and at shipping. S-DBR has a buffer at

shipping and manages the flow of work across the drum through a load planning mechanism. BSC Page 40

shipping and manages the flow of work across the drum through a load planning mechanism.

The rope is the work release mechanism for the plant. Orders are released to the shop floor at one

"buffer time" before they are due. In other words, if the buffer is 5 days, the order is released 5 days

before it is due at the constraint. Putting work into the system earlier than this buffer time is likely to

generate too-high work-in-process and slow down the entire system.

Supply chain / logisticsIn general, the solution for supply chains is to create flow of inventory so as to ensure greater availability

and to eliminate surpluses.

The TOC distribution solution is effective when used to address a single link in the supply chain and

more so across the entire system, even if that system comprises many different companies. The purpose

of the TOC distribution solution is to establish a decisive competitive edge based on extraordinary

availability by dramatically reducing the damages caused when the flow of goods is interrupted by

shortages and surpluses.

This approach uses several new rules to protect availability with less inventory than is conventionally

required. Before explaining these new rules, the term Replenishment Time must be defined.

Replenishment Time (RT) is the sum of the delay, after the first consumption following a delivery, before

an order is placed plus the delay after the order is placed until the ordered goods arrive at the ordering

location.

1. Inventory is held at an aggregation point(s) as close as possible to the source. This approach ensures

smoothed demand at the aggregation point, requiring proportionally less inventory. The distribution

centers holding the aggregated stock are able to ship goods downstream to the next link in the supply

chain much more quickly than a make-to-order manufacturer can. Following this rule may result in a

make-to-order manufacturer converting to make-to-stock. The inventory added at the aggregation point

is significantly less than the inventory reduction downstream.

2. In all stocking locations, initial inventory buffers are set which effectively create an upper limit of the

inventory at that location. The buffer size is equal to the maximum expected consumption within the

average RT, plus additional stock to protect in case a delivery is late. In other words, there is no

advantage in holding more inventory in a location than the amount that might be consumed before

more could be ordered and received. Typically, the sum of the on hand value of such buffers are 25-75%

less than currently observed average inventory levels.

3. Once buffers have been established, no replenishment orders are placed as long as the quantity

inbound (already ordered but not yet received) plus the quantity on hand are equal to or greater than

the buffer size. Following this rule causes surplus inventory to be bled off as it is consumed.

4. For any reason, when on hand plus inbound inventory is less than the buffer, orders are placed as

soon as practical to increase the inbound inventory so that the relationship On Hand + Inbound = Buffer

is maintained.

5. To ensure buffers remain correctly sized even with changes in the rates of demand and

replenishment, a simple recursive algorithm called Buffer Management is used. When the on hand

inventory level is in the upper third of the buffer for a full RT, the buffer is reduced by one third (and

don’t forget rule 3). Alternatively, when the on hand inventory is in the bottom one third of the buffer

for too long, the buffer is increased by one third (and don’t forget rule 4). The definition of “too long”

may be changed depending on required service levels, however, a general rule of thumb is 20% of the

RT. Moving buffers up more readily than down is supported by the usually greater damage caused by

shortages as compared to the damage caused by surpluses.

Once inventory is managed as described above, continuous efforts should be undertaken to reduce RT,

late deliveries, supplier minimum order quantities (both per SKU and per order) and customer order

batching. Any improvements in these areas will automatically improve both availability and inventory

turns, thanks to the adaptive nature of Buffer Management.

A stocking location that manages inventory according to the TOC should help a non-TOC customer

(downstream link in a supply chain, whether internal or external) manage their inventory according to

the TOC process. This type of help can take the form of a Vendor Managed Inventory (VMI). The TOC

distribution link simply extends its buffer sizing and management techniques to its customers’

inventories. Doing so has the effect of smoothing the demand from the customer and reducing order

sizes per SKU. VMI results in better availability and inventory turns for both supplier and customer.

More than that, the benefits to the non-TOC customers are sufficient to meet the purpose of capitalizing

on the decisive competitive edge by giving the customer a powerful reason to be more loyal and give

more business to the upstream link. When the end consumers buy more the whole supply chain sells

more.

One caveat should be considered. Initially and only temporarily, the supply chain or a specific link may

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One caveat should be considered. Initially and only temporarily, the supply chain or a specific link may

sell less as the surplus inventory in the system is sold. However, the immediate sales lift due to

improved availability is a countervailing factor. The current levels of surpluses and shortages make each

case different.

Finance and accountingThe solution for finance and accounting is to apply holistic thinking to the finance application. This has

been termed throughput accounting.[8] Throughput accounting suggests that one examine the impact of

investments and operational changes in terms of the impact on the throughput of the business. It is an

alternative to cost accounting.

The primary measures for a TOC view of finance and accounting are: Throughput (T), Operating Expense

(OE) and Investment (I). Throughput is calculated from Sales (S) - Totally Variable Cost (TVC). Totally

Variable Cost usually considers the cost of raw materials that go into creating the item sold.

Project managementCritical Chain Project Management (CCPM) is utilized in this area.[9] CCPM is based on the idea that all

projects look like A-plants: all activities converge to a final deliverable. As such, to protect the project,

there must be internal buffers to protect synchronization points and a final project buffer to protect the

overall project.

Marketing and salesWhile originally focused on manufacturing and logistics, TOC has expanded lately into sales

management and marketing. Its role is explicitly acknowledged in the field of sales process

engineering.[10] For effective sales management one can apply Drum Buffer Rope to the sales process

similar to the way it is applied to operations (see Reengineering the Sales Process book reference

below). This technique is appropriate when your constraint is in the sales process itself or you just want

an effective sales management technique and includes the topics of funnel management and conversion

rates.[citation needed]

The TOC thinking processesMain article: Thinking Processes (Theory of Constraints)

Gain agreement on the problem1.

Gain agreement on the direction for a solution2.

Gain agreement that the solution solves the problem3.

Agree to overcome any potential negative ramifications4.

Agree to overcome any obstacles to implementation5.

The Thinking Processes are a set of tools to help managers walk through the steps of initiating and

implementing a project. When used in a logical flow, the Thinking Processes help walk through a buy-in

process:

TOC practitioners sometimes refer to these in the negative as working through layers of resistance to a

change.

Recently, the Current Reality Tree (CRT) and Future Reality Tree (FRT) have been applied to an

argumentative academic paper.[11]

Development and practiceTOC was initiated by Dr. Eliyahu M. Goldratt, who until his recent death was still the main driving force

behind the development and practice of TOC. There is a network of individuals and small companies

loosely coupled as practitioners around the world. TOC is sometimes referred to as "Constraint

Management". TOC is a large body of knowledge with a strong guiding philosophy of growth.

CriticismCriticisms that have been leveled against TOC include:

Claimed Suboptimality of Drum-Buffer-RopeWhile TOC has been compared favorably to linear programming techniques,[12] D. Trietsch from

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While TOC has been compared favorably to linear programming techniques,[12] D. Trietsch from

University of Auckland argues that DBR methodology is inferior to competing methodologies.[13][14]

Linhares, from the Getulio Vargas Foundation, has shown that the TOC approach to establishing an

optimal product mix is unlikely to yield optimum results, as it would imply that P=NP.[15]

Unacknowledged debtDuncan (as cited by Steyn)[16] says that TOC borrows heavily from systems dynamics developed by

Forrester in the 1950s and from statistical process control which dates back to World War II. And

Noreen Smith and Mackey, in their independent report on TOC, point out that several key concepts in

TOC "have been topics in management accounting textbooks for decades."[17]

People claim[citation needed] Goldratt's books fail to acknowledge that TOC borrows from more than 40 years

of previous Management Science research and practice, particularly from PERT/CPM and JIT. A rebuttal

to these criticisms is offered in Goldratt's "What is the Theory of Constraints and How Should it be

Implemented?", and in his audio program, "Beyond The Goal". In these, Goldratt discusses the history of

disciplinary sciences, compares the strengths and weaknesses of the various disciplines, and

acknowledges the sources of information and inspiration for the Thinking Processes and Critical Chain

methodologies. Articles published in the now-defunct Journal of Theory of Constraints referenced

foundational materials. Goldratt published an article[citation needed] and gave talks[18] with the title

"Standing on the Shoulders of Giants" in which he gives credit for many of the core ideas of Theory of

Constraints. Goldratt has sought many times to show the correlation between various improvement

methods. However, many Goldratt adherents often denigrate other methodologies as inferior to

TOC[citation needed].

Linear programming•

List of Theory of Constraints topics•

Systems thinking — Critical systems thinking — Joint decision traps•

Twelve leverage points by Donella Meadows•

Constraint (disambiguation)•

Thinklets•

Throughput•

See also

Pasted from <http://en.wikipedia.org/wiki/Theory_of_Constraints>

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From Wikipedia, the free encyclopedia

(Redirected from Thinking Processes (Theory of Constraints))

This page is about thinking processes in the Theory of constraints. Wikipedia also has a list of thought

processes.

Thinking processes in Eliyahu M. Goldratt's Theory of Constraints, are the five methods to enable the

focused improvement of any system (especially business system).

Purpose

What to change?1.

What to change to?2.

How to cause the change?3.

The purpose of the thinking processes is to help one answer questions essential to achieving focused

improvement:

Why Change?4.

Sometimes two other questions are considered as well:

How to maintain the process of ongoing improvement (POOGI)?5.

and:

A more thorough rationale is presented in What is this thing called Theory of Constraints and how should

it be implemented.[1]

A more thorough work mapping the use and evolution of the Thinking Processes was conducted by

Mabin et al.[2]

Processes

Current Reality Tree (CRT, similar to the current state map used by many organizations) —

evaluates the network of cause-effect relations between the undesirable effects (UDE's, also

known as gap elements) and helps to pinpoint the root cause(s) of most of the undesirable effects.

•

Evaporating Cloud (conflict resolution diagram or CRD) - solves conflicts that usually perpetuate

the causes for an undesirable situation.

•

Core Conflict Cloud (CCC) - A combination of conflict clouds based several UDE's. Looking for

deeper conflicts that create the undesirable effects.

•

Future Reality Tree (FRT, similar to a future state map) - Once some actions (injections) are

chosen (not necessarily detailed) to solve the root cause(s) uncovered in the CRT and to resolve

the conflict in the CRD the FRT shows the future states of the system and helps to identify possible

negative outcomes of the changes (Negative Branches) and to prune them before implementing

the changes.

•

Negative Branch Reservations (NBR) - Identify potential negative ramifications of any action (such

as an injection, or a half-baked idea). The goal of the NBR is to understand the causal path

between the action and negative ramifications so that the negative effect can be "trimmed."

•

Positive Reinforcement Loop (PRL) - Desired effect (DE) presented in FRT amplifies intermediate

objective (IO) that is earlier (lower) in the tree. While intermediate objective is strengthened it

positively affects this DE. Finding out PRLs makes FRT more sustaining.

•

Prerequisite Tree (PRT) - states that all of the intermediate objectives necessary to carry out an

action chosen and the obstacles that will be overcome in the process.

•

Transition Tree (TT) - describes in great detail the action that will lead to the fulfillment of a plan

to implement changes (outlined on a PRT or not).

•

Strategy & Tactics (S&T) - the overall project plan and metrics that will lead to a successful

implementation and the ongoing loop through POOGI. Goldratt adapted three operating level

performance measures—throughput, inventory and operating expense—and adopted three

strategic performance measures—net income, return on investment, and cash flow—to maintain

the change.

•

The primary thinking processes, as codified by Goldratt and others:

Some observers note that these processes are not fundamentally very different from some other

management change models such as PDCA "Plan-Do-Check-Act" (aka "Plan-Do-Study-Act") or "Survey-

Thinking processes (Theory of Constraints)8 сентября 2011 г.

19:34

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management change models such as PDCA "Plan-Do-Check-Act" (aka "Plan-Do-Study-Act") or "Survey-

Assess-Decide-Implement-Evaluate", but the way they can be used is clearer and more straightforward.

More on this can be seen on Goldratt's Theory of Constraints - A Systems Approach to Continuous

Improvement by William Dettmer ISBN 0-87389-370-0.

jThinker is an open-source tool for visual building of thinking processes diagrams.•

Harmony is a Strategy & Tactics Expert System.•

Flying Logic a cross platform TOC thinking process suite.•

Software

H. William Dettmer. The Logical Thinking Process: A Systems Approach to Complex Problem

Solving (2007). ISBN 978-0-87389-723-5

•

H. William Dettmer. Strategic Navigation: A Systems Approach to Business Strategy (2003). ISBN

0-87389-603-3

•

Eliyahu M. Goldratt and Jeff Cox. The Goal: A Process of Ongoing Improvement. ISBN

0-88427-061-0

•

Eliyahu M. Goldratt. It's Not Luck. ISBN 0-88427-115-3•

Eliyahu M. Goldratt. Critical Chain. ISBN 0-88427-153-6•

Eliyahu M. Goldratt, Eli Schragenheim, Carol A. Ptak. Necessary But Not Sufficient. ISBN

0-88427-170-6

•

Lisa J. Scheinkopf Thinking For a Change: Putting the TOC Thinking Processes to Use. ISBN

1-57444-101-9

•

Eli Schragenheim. Management Dilemmas: The Theory of Constraints Approach to Problem

Identification and Solutions. ISBN 1-57444-222-8

•

John Tripp TOC Executive Challenge A Goal Game. ISBN 0-88427-186-2•

Books

Pasted from <http://en.wikipedia.org/wiki/Thinking_Processes_(Theory_of_Constraints)>

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Line-haul the transporting of items or persons between terminals

Point-of-use

inventory

the practice of storing any inventory you have at the point where it will be used (in

contrast to inventory that is stored in a warehouse, or at some other secondary

location)

Takt In JIT takt sets the pace for manufacturing lines

The time needed to complete work on each station has to be less than the takt time in

order for the product to be completed within the allotted time.

Takt = Daily operating time / required quantity per day

Poka-yoke is any mechanism in a lean manufacturing process that helps an equipment operator

avoid (yokeru) mistakes (poka). Its purpose is to eliminate product defects by

preventing, correcting, or drawing attention to human errors as they occur.

PYS (Poka-Yoke System) implies 100% control.

Cash flow

statement

shows source and application of fund

More definitions14 сентября 2011 г.

12:30

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