Abstract
The biggest problem most faced today by organisations is that whether they should look at their individual profitability & performance, or the overall supply chain’s performance. Often, the supply chain members implement procedures beneficial for their performance, resulting in poor performance of the supply chain. To improve the existing level of performance, organizations need to use new improvement solutions. Therefore, many organizations have started implementing Theory of Control approach to enhance their supply chain performance.
In an organisation, a lot of energy is spent on optimizing separate assets, functions and resources. Theory of Constraints shifts this focus to increasing the flow and the throughput generated by the system. The basic focus of TOC’s process is on removing the barriers from the system as a whole. Every system has a Constraint or a bottleneck which limits the system’s output. It can be a machine, an employee or even shelf space. It is the chain’s weakest link.
Also, Lean management is defined as ‘a manufacturing philosophy that shortens the timeline between customer order and shipment by eliminating waste’ and its continuous application benefits by reducing lead time, increasing capacity utilisation and by lowering inventory. But, Lean’s goal of ‘perfection’ throughout the organisation is difficult to implementation as the question becomes where to start from? TOC provides a methodology to identify the priority areas and improvements, so that the impact on the company is the most.
Introduction
“If we dive deep enough we’ll find that there are very few elements at the base, the root causes, which through cause-and-effect connections, are governing the whole system. The result of systematically applying the question “Why?” is not enormous complexity, but rather wonderful simplicity” – Eliyahu Goldratt
A constraint is a limiting factor that stands in the way of achieving a particular goal. It is often referred to as a bottleneck. These arise due to a particular process or resource acting like a limiting factor, which can be attributed to unexamined assumptions about the system that is being attempted to improve. To eliminate these constraints and bottlenecks, these assumptions should be broken. Also, these resources need to be identified. To achieve this, we use the concept of TOC. So, what is TOC? Theory of Constraints is a management theory that identifies these very constraints that are limiting the organisation or the management in achieving their goals. In a nutshell, it is anything which is holding back the system. Removing these constraints will result in increased throughput and increased quality of the system. If you identify the constraint wrongly, the system suffers even worse.
Using the Five Focusing Steps of Theory of Constraints, one can identify and eliminate constraints. Then, using TOC tool, answer these three questions for any constrain in the system:
1. What to change?
2. What to change to?
3. How to change?
After answering these questions, you shall outline a path for future and remove the constraints.
Theory of Constraints (TOC) has permeated every sector and can be used in almost any company irrespective of the size of the organisation. TOC has evolved over time, starting from production process planning, allocating resources to the current scenario where it has now become a management philosophy. The TOC evolution can be analysed over a timeline leading to formation of 5 major eras.
1. Optimised Production Technology Era (1979-1984)
There was a spur in the usage of the Optimised Production Technology (OPT) in the industry when it was introduced by Goldratt in 1979. There were various studies done about the possible usage of OPT in different scenarios – scheduling and production planning (1983), on factory floor (Fox 1984), manufacturing (Harrison 1995), benchmarking of MRP, JIT, OPT, FMS (Aggarwal 1985 and Gelders & Waasenhove 1985), mooting of drum buffer rope concept in OPT (Ronnen and Starr 1990).
2. The Goal Era (1984-1990)
The Five Focusing Steps (5FS) form the bedrock of TOC. It grapples with 3 fundamental questions while dealing with constraint (which thing to change to what and how to do so). Throughput needs to be increased, inventory and operating expense needs to be reduced.
3. The Haystack Syndrome Era (1990-1994)
TOC is a process focussed performance measurement system. The focus is on to improve the throughput accounting. Net profit, return on investment (ROI), cash flow refers to the financial measurements. In addition to this, there are the operational measurements like throughput, inventory, operating expense. The relationship among activity based costing, absorption variable costing and TOC was established by Demircioglu et. al (2010).
4. The it’s not Luck Era (1994-1997)
Thinking Processes (TPs) were established to focus on constraint factors. The cause-effect logic is applied Current Reality Tree (CRT), Future Reality Tree (FRT), Transition Tree (TT). Evaporating Cloud (EC) and Prerequisite Tree (PT) use necessary condition logic. CRT deals with the current state whereas FRT and EC deal with the identified issue. PRT deals with removing obstacles in implementation whereas TT creates implementation plan.
Research Paper I – Summary
Review on TOC: Different Paradigms
During the past 25 years, three Theory of constraints paradigms evolved, Global performance measures, thinking process, and logistics. These are currently referred to as performance management system, thinking process and decision making.
Logistic Paradigm:
The evolution started from optimization production technology, a scheduling software which itself was based on Drum Buffer Rope technique and the TOC’s focusing steps. Logistic paradigm was applicable in services, supply chain, project management, and manufacturing. A survey was conducted to compare the performance and the change in performance in companies following TOC and JIT, and it was observed that the companies which are following TOC are performing better. The buffer systems of JIT and TOC are evaluated and it was observed that DBR was highly effective because it maximizes protection of constraint.
Global Performance Measures:
TOC ultimately considers making money as the objective. The three measures of throughput, operating expense and inventory focuses to achieve global maximum by increasing throughput, reducing the inventory and operating expenses.
Thinking Process Paradigm:
Major part of methodology of TOC is the thinking process, which majorly aims are understanding what to change to, what to change, and how to make the change? The thinking process consists of logic diagrams or tree that provide road map. Current Reality Tree(CRT) depicts the current state of affairs and cause and effect relationships to find root cause, Future Reality Tree (FRT) are used to test potential solutions. Transition Tree (TT) describes the situation state as it changes, these use cause and effect logic. Evaporating cloud (EC) and prerequisite tree (PRT) are used to identify and overcome the obstacles, these are based on necessary condition thinking. PRT acts as a bridge between TT and FRT
Research Paper II – Summary
Lean Manufacturing through Theory of Constraints:
Lean Manufacturing stipulates the performance improvement through the reduction of wastes in organizations. Similarly, Theory of Constraints (TOC) attains performance improvement through the removal of constraints in organizations. So there is a need to integrate both since they have a common objective “performance improvement”.
Even though both Theory of Constraints and Lean Manufacturing focus towards performance improvement (i.e. uses systematic methods to increase manufacturing effectiveness) they have very different approaches:
• TOC application leads to improving manufacturing capacity because identify and removes constraints that limits throughput
• Lean manufacturing reduces manufacturing cost because its focus is towards eliminating waste in manufacturing process
Laser-like focus on improving the constraint is one of the most powerful aspects of the Theory of Constraints. Lean Manufacturing is implemented as a broad-spectrum tool in various industries. Since all companies have finite resources in the real world, there is always a need to compromise in output for any organization. Not every aspect of every process is truly worth optimizing, and not all waste is truly worth eliminating. It is because there always exists a breakeven point beyond which the cost increases. Also as per Goldratt any business has to focus about maximizing its goal which is money. So if we go on optimize and reduce waste it will lead to huge cost incur for the organization. In this context, a rich toolbox of improvement techniques can be provided by Lean manufacturing and the Theory of Constraints can prioritize improvement projects by using a highly effective mechanism. The result – waste has been eliminated from the parts of the system that are the largest constraints on opportunity and profitability thereby increasing manufacturing effectiveness.
While Lean Manufacturing tools and techniques are primarily applied to the constraint, they can also be applied to equipment that is subordinated to the constraint (e.g. for the equipment that blocks the constraint also for the quality losses due to post-constraint equipment).
The below figure explains the various steps of TOC and how lean manufacturing is utilized as a tool:
Lean Tool Description
• Value stream mapping Identifying the constraints:
• Provides foundation, engage teams, aids in documentation Ex: cycle time can be marked to map
• 5S
• Standardized work Exploit the constraint:
• Enables faster identification, creates foundation, provides increased motivation for better performance of constraints
• By applying standardized procedures increases throughput and reduces variability
• Kanban Subordinate the constraint:
• Helps in synchronizing material usage in upstream using simple visual technique
• TPM-total productive maintenance Elevate the constraint
• Reduces frequency of constraint, targets quality issue, proper scheduling and planning on non-production time
Research Paper III – Summary
These days, the opposition is not among organizations but rather among the SCs, which have a place with. In that situation, in spite of the fact that the primary objective of the SCM is to achieve an answer with improved benefit for every one of SC’s accomplices, there is frequently an extraordinary dissimilarity between potential advantages and the practice. This circumstance happens in light of the fact that there are a few challenges with respect to SC which require to be settled by a proficient SCM. Some of these troubles are: long lead times, extensive number of unfulfilled requests and additionally they are executed with much additional exertion (extra minutes), abnormal state of pointless inventories as well as absence of significant inventories, wrong materials orders, extensive number of crisis requests and undertaking levels, abnormal amounts of devolution, absence of key clients engagement, visit changes and/ then again nonattendance of control identified with need orders, which infers on timetable clashes of the assets, among numerous others.
We see below the application of Theory of Constraints to Supply Chain Management and what are the difficulties in adopting Theory of Constraints in real life implementation. We will also analyse how the adoption of Vendor Managed Inventory and Business-to-Business tools can support a better SCM solution.
Main SCM Dilemma According to Theory of Constraints
In a run of the mill SC, the moderate estimated accomplices concentrate just all alone creation administration system, deals and money related arranging. This activity will debase the relationship and association in the SC. Figure 1, in view of Santos et al. (2007), shows a customary conduct for a SC’s moderate measured accomplice, where the Focal Company (FC) utilizes the business estimating for its clients and does the creation arranging and sends buy requests to providers by method for a MRPII framework. Stock abundance or generation interference persistently happens, coming about to an upstream SC’s accomplices from the FC, the marvel of progressive slip-ups in the data of the request happens, surely understood as bullwhip impact (Lee et al., 1997b).
Connected with this situation, a graph can be utilized to catch and portray the principle SCM problem, and how the SC’s accomplices work attempting to unravel this issue. Looking at the upper and lower ways of Figure 2, it is conceivable to confirm the disparity between techniques that can be executed by SC’s individuals to show signs of improvement coordinated effort levels (Simatupang et al., 2004). As per Blackstone (2001), in the upper way of the graph, where every SC’s part concentrates on the incomes augmentation for the entire SC, this objective can be gotten by making strides the deals to SC’s end-clients. A superior SC pay might be accomplished through a synchronized execution of SC’s accomplices, every one of them concentrated on the worldwide pick up also, advancing reasonable pick up dispersion among them. Then again, in the lower way of the chart, the SC’s accomplices are settling on mistaken choices in light of a mixed up appreciation in which they are taking incredible preferred standpoint by ensuring that they possess benefit (Blackstone, 2001). This conduct happens on the grounds that SC’s individuals comprehend that they “get profits by joint effort just if their net revenue is improved and they are in charge of guaranteeing significant yields to their shareholders”.
Constraint Management and Supply Chain Management
“In spite of the fact that the primary purpose in production network cooperation is to accomplish a win-win answer for every taking an interest part, there is regularly a substantial dissimilarity amongst possibilities and practice, where coordinated effort implies a power amusement among the chain individuals” (Simatupang et al., 2004). The most hurtful outcome of this situation is the overabundance of inventories in the SC. Why does stock ascent? TOC manages that, even with the utilization of ordinary devices of the SCM, there is still an extensive waste with stock in the SC all in all.
With the usage of SCM apparatuses, promptly the plants can get data from their providers on stock levels. Furthermore, with the appropriation of coordinated ERP’s frameworks and consistent change programs, they are making strides quality and profitability with the decrease of supply lead-time. The issue watched by Goldratt et al. (2000) is that the supply lead times are being diminished yet the same is not happening with the inventories, once the plants are keeping up inventories levels in light of the forecast of utilization. In all actuality, it is difficult to conjecture with exactness the utilization of a particular item at a particular locale with weeks of progress.
It can be said that an imperative variable that maintains a strategic distance from a SC from amplifying its benefits is the event of unequal inventories over the SC. In addition, one might say that it is brought about for the most part by that SC’s accomplice who acts exclusively and takes after the lower way in Figure 2 (SCM quandary), while the best-prescribed conduct would be to add to the worldwide streamlining. It is notable that the exactness of an estimating technique depends, among different variables, on if the objective is to get data (forecast) about collected (for an item family, a market locale, or a gathering of clients) or individual deals to end-clients; and the relative position (upstream or downstream, far or close to the end-client) of that SC’s part who will do the gauging. Along these lines, it is essential to recognize who is the SC’s accomplice better fit the bill to get more exact estimate to end-client deals, and in this manner the SC in general, must receive its estimate comes about for creation and appropriation arranging, to compute inventories levels, to arrange recharging, etc. Yet, by TOC approach, the best thing to do is to guarantee that when a plant produces to recharging stock of a specific stockroom, the overabundance of item made ought to be put away at the processing plant itself, rather than sending items to all stockrooms where, in ordinarily, the recharging is a bit much, as clarified some time recently. Since the utilization of the industrial facility stock is a general capacity of end-client’s request, it is liable to less fluctuation and, in the meantime, the plant stock turnover is fundamentally speedier. As an outcome of that approach, the plants will never need to make little item parcels, what’s more, they can offer a superior support of the stockrooms in the SC’s downstream, on the grounds that they can keep up even an every-day (or by an other balanced process duration) renewal, if essential, to every stockroom, utilizing a truck-stack appropriation plot (step 2). As such, the thought is to keep enough inventories (TOC support) in the plants and to renew the stockroom inventories just to go to genuine deals to the end-clients. Hence, as TOC step 3 demonstrates, the SC’s item stream control ought to be subordinated to the industrial facility supports administration. Thusly, the aggregate stock level in the SC in general will be essentially lessened.
Finally, another worldview to be trailed by SC’s accomplices could be built up so as to guarantee a proficient usage of this portrayed TOC’s approach: the benefits ($) of the SC’s individuals will be ensured just if the items were sold to the end-clients. This worldview appears differently in relation to the conventional administer typically received where every SC’s part delivers benefits ($) by offering to others accomplices. In this way, every one of SC’s individuals ought to adjust its objectives to a worldwide gainfulness SC, and the waste in the SC will be lower.
Vendor-Managed Inventory and Business-to-Business
The natural variability presented in the parameters or attributes of the managerial systems was first suggested by Taylor in the year 2004. Such variability was visible even after being well administered. Supply chain management complications finds the inception of complication from the increase in values of this natural variability. It is a butterfly effect in the chain where even a short delay in one of the processes can cause a snowball effect in the subsequent processes. This could ultimately lead to a fall-back on the deadline promised to the end-customer, which cannot be reversed in any way.
The Bullwhip Effect
The above figure 4, depicts the effect known as the bullwhip effect. The decisions made based on the given scenario is that of a demand boost to supply chain partners in the upper stream of the flow. This effect causes an unfavourable impact, the inventory safety level gets increased and/or cause a blow to the service level, increasing the inadequacy of products. Lee at al. (1997) recommends the following explanation behind the bullwhip effect:
1. Processing of the anomalies in the demand: There is an absence of the estimation of the real consumption of the products of the suppliers and manufacturers which causes an anomaly in the demand. The solution to mitigate this is to communicate the intel of the consumption with the companies that are part of the supply chain.
2. Rationing (purchase to prevent shortages): Due to the general incidents of the shortage of products, the norm in the companies are to place orders for quantities more than required, in place of actual requirements. Such a situation can be averted by the sharing of information about the inventory and production by the manufacturer.
3. Development of purchase and production lots: While placing order, there are various fixed costs which have to be borne, making it the primary cause for application of lots. It can also be attributed to the production and movement of the product. To mitigate this, the solution is to cut the fixed costs of the order.
4. Price Variations: Daily low price policies should be used to avoid the variations in the flow of materials, attributed to the blueprint of variations in the price, other commercial policies should also be used to achieve the same.
Vendor-Managed Inventory – VMI
One of the most successful and important tools that ensures the reduction of the bullwhip effect is the Vendor-Managed Inventory. It is system which facilitates sharing of information of demand and inventory in the supply chain. This helps in curtailing the bullwhip effect and favours slashing of the inventory and logistic costs. The following diagram compares the Vendor-Managed Inventory to other models, namely, conventional and consignment.
Examples from Professional Life
Observing Reliance industries ltd Jamnagar refinery operations through the lens of TOC:
The Vacuum Gas Oil Hydro treater (VGOHT) plant uses cuts from Atmospheric and Vacuum Distillation Columns as feeds and treats the sulphurs impurities by utilising Hydrogen and converting them into H2S and the treated product is sent to Fluid Catalytic Cracker to further processing. Hydrogen for the hydro treating is made available from Hydrogen Manufacturing Units (HMU) by processing Sat and Unsat gases of the refinery. Inside a refinery due to the sheer scale of operations, all the plants have buffers tanks available as needed. An hour lost on the bottle neck is an hour lost on the entire system is applicable in this situation because all the capacities of plants are optimized and if any one plant has an emergency entire through put capacity comes down because due to the scale of the operations and optimized capacities all the plants are bottlenecks. Among all the different plants FCC and VGOHT are the critical plants to maintain sustainable operations.
During October 2015, VGOHT underwent Catalyst change over operations. Refinery has overall 4 VGOHT to cater the demand of FCC, but with 1 plant under shutdown, VGOHT became the bottleneck for the entire refinery, the upstream units were unable to process to full capacity and even the downstream plants. One of the HMU was operating at 50% capacity when the turndown rate was 40%, this lead to lack of efficiency and energy wastage leading to higher costs, but the HMU was still operated at 50% throughput.
In this particular situation, we can observe the application of various rules of theory of constraints in production scheduling. HMU continued running at 50% capacity bearing the losses since even if operated at high capacity there was no downstream consumer because of the bottle neck. An hour saved on the non-bottle neck is a mirage applies very well to the situation. All the downstream plants were running at decreased capacities because the bottle neck was governing the throughput and inventories of the system. In this situation flow to demand was balanced and, it was made sure that rest 3 VGOHT operates at maximum possible capacities because of the bottleneck.
TOC in Drilling and Upstream Oil production:
TOC also manifested itself in my professional life. I was a Drilling and Completion engineer in the Shale Gas Department at Reliance Industries Limited. The hydraulic fracturing activity follows the drilling of the gas well. After fracturing, there is the flowback, milling of the plugs and other post frac activities. We were not meeting our target of completing certain number of gas wells per month. We formed a multi-disciplinary team to look into the issue. In the end we zeroed in on the fracturing part as the limiting factor in the entire process. We had ample land on which all construction had been done which was ready for drilling. Similarly, we had good number of drilling rigs to continue the process. However, we just had two frac fleets at our disposal. This was leading to a delay in the entire operations effectively acting as a bottle neck. We requested the upper management to hire one additional frac fleet. At the same time, we kept on drilling at our normal rate so that we have a buffer of drilled wells ready to be fracked and the input should not act as a limiting factor holding up our operations. This helped us approximately two months later when the well we were fracking had to be abandoned mid -way due to geological issues. Thus we had a drilled well on hand to move to and start fracking there. We also managed to get permission to do night time fracking thus doubling our capacity to frack the wells. In this way we were able to apply the TOC concept to meet our desired targets for the subsequent months.
Conclusion
It has been observed that even though Theory of constraint and lean management have a different function, they both focus towards performance improvement. In the 5 step process of TOC, we can integrate the lean tools. These lean tools will help to find and eliminate the constraint in an efficient manner. But there is a breakeven point till which this integration can be applied beyond which losses tend to occur. This is why, the application of TOC enhances the power of Lean management substantially to eliminate problems.
Main focus of the TOC is on finding the constraints and resolving the problems finally. This approach is to be followed continuously so that further optimization of the system is possible and this method requires a lot of effort from all the members of the chain. Supply Chain Management is one of the areas that can benefit by the application of TOC because supply chain includes everything from resourcing to till the product reaches the customer. Finding the bottle neck and operating the supply chain will effectively eliminate any redundancies and inefficient operations. Since lot of departmentalisations are available in Supply Chain, all the members will be looking at their own profitability, but by effectively using TOC, we can focus on delivery of the product to the end customers by finding constraints at each level.
Successful implementation of theory of constraints will have the benefit of increased profits, fast improvement, improved capacities, reduced lead times and inventory.
References
2016-12-24-1482580257