TOCICO. TOC Fundamentals Exam

Transcription

1 TOCICO Exam Review Session Written and Presented by: C. Grant Lindsay and Richard Reid Date: Nov 2006 Note: Some slides in this presentation have been used or adapted,, with permission, from a presentation developed by Alan Barnard. 1

2 Workshop Deliverables TOC-ICO certification structure overview. Discuss fundamental TOC concepts. Suggestions for successfully completing the exam. Review of some sample exam questions. Provide an opportunity to answer and discuss some illustrative exam questions. Answer your questions. 2

3 TOCICO CERTIFICATION ROADMAP TOCICO Certification for Practitioners TOCICO Certified PRACTITIONER TOCICO Certification for Implementers TOCICO Certified IMPLEMENTER Step 3 Submit Case Study Demonstrate expert level synthesis & evaluation ability in leading the IMPLEMENTATION of one or more specific TOC applications by Submitting Case Study of actual implementation Step 2 - Pass Application Exam Demonstrate expert level analysis & APPLICATION ability in specific TOC application by passing TOCICO Application Exam Step 2 - Pass Application Exam Demonstrate expert level analysis & APPLICATION ability in specific TOC application by passing TOCICO Application Exam TOCICO Certificate of Achievement Step 1 - Pass TOCICO Fundamentals Exam Demonstrate knowledge & understanding in the fundamentals of all TOC applications 3

4 What is Theory of Constraints? Theory of Constraints provides a set of Holistic processes and rules, all based on a Holistic/Systems approach, that simplifies the complexity of improving and managing complex organizations through FOCUSING on the FEW physical & logical constraining LEVERAGE POINT(S) and building the necessary & sufficient LEVERS (holistic rules) that will SYNCHRONIZE the parts to achieve an ongoing & step change improvement in the performance of the system as a whole THEORY OF CONSTRAINTS After more than 30 years of Development and Evolution Part 1 5 Focusing Steps Part 2 Thinking Processes Part 3 Throughput Accounting Part 4 TOC Generic Solutions Part 5 Implementing TOC Viable Vision 1. Identify the System s Constraint 2. Decide how to Exploit the Constraint 3. Subordinate everything to the above decisions 4. Elevate the System Constraint 5. If in the previous steps a constraint has been broken, Go back to step UDE Evaporating Cloud (EC) 2. Current Reality Tree (CRT) 3. Core Conflict Cloud (CCC) 4. Future Reality Tree (FRT) 5. Negative Branch Reservations (NBR) 6. Pre-requisite Tree (PRT) 7. Transition Tree (TrT) 8. Strategy & Tactics (S&T) 1. Throughput (T): The rate at which the system generates money through Sales (SR - VC) 2. Investment (I): The money tied up in the organization 3. Operating Expenses (OE): All the money spent by the system to convert investment into throughput 4. Net Profit (NP) = T OE 5. Return on Investment (ROI) = NP/I 1. Operation Drum-Buffer-Rope 2. Finance Throughput Acct. 3. Projects Critical Chain 4. Logistics Pull Replenishment 5. Marketing Unrefusable offers 6. Sales Buy-in Process 7. People Empowerment 8. Strategy 1+4x4 process 1. VV Offer: Profits equal to current sales within four years 2. Eight templates for success. 3. Applying the templates. 4

5 The Evolution of TOC over 30 years TOC Evolution over last 30 years The Thinking Processes Jonah Program Production, Throughput Accounting OPT, The Goal, The Race, The Haystack Syndrome TOC & Strategy (Viable Vision) Dramatic Overall Improvements TOC & Technology Necessary but not Sufficient The TOC Holistic Approach 8 Video Sessions Project Management Critical Chain Distribution, Marketing, Management Skills It s Not Luck Dr Eli Goldratt and the International TOC Community of Practitioners, Educators & Experts

6 Keys to Writing a Successful Exam The Fundamentals Exam (FE) is structured to ascertain your knowledge and understanding of basic TOC tools and concepts. Some requirements for successfully completing the FE include: 1. Knowledge of the steps in TOC improvement approaches. 2. Understanding of basic TOC principles concepts and tools. 3. Application of TOC improvement approaches and tools to specific scenarios. 6

7 Some Suggestions for Writing a Good Exam Carefully read and understand the question Ask yourself what is given and what is being requested If question seems unclear, then record relevant assumptions before writing your answer Answer all parts of the question Relate the question to your answer Show your work where applicable Do not provide excessive information that has not been requested 7

8 TOCICO Fundamentals Exam Outline Part A Simple vs. Complex Systems Global vs. Local Improvement The Five Focusing Steps Part B TOC Thinking Processes The Change Sequence: Answering Three Questions UDEs, Conflicts and Injections Negative Branch Reservations Resistance to Change Part C TOC Applications Supply Chain and Operations Finance and Measurement Project Management 8

9 Part A Achieving a Process of Ongoing Improvement Every Improvement is a Change, but not every Change is an improvement 1. How can we know whether a planned change will result in an improvement for the system as a whole? 2. How can we achieving a process of ongoing improvement? Strengthening the Weakest Link The Theory of Constraints (TOC) make the case that a change will only be a total system improvement if the change improves or protects the performance of the System Constraint (the weakest link). Therefore, to measure the impact of our recommended change, we should identify the expected impact on the System Constraint and therefore on increasing the flow of goal units through the system. In TOC, we use the Five Focusing Steps and the measure progress with the 3 Global Performance Metrics: (1) Throughput (Sales Variable Cost), (2) Investment/Inventory and (3) Operating Expense to drive and enable a Process of Ongoing Improvement. 9

10 A Focused Process for Breakthrough and Continuous Improvement 5 Focusing Steps of the Process of Ongoing Improvement (POOGI) Step 0: Agree on the System GOAL (& to define constraint and goal metrics) Step 1: IDENTIFY the System Constraint (the Weakest Link) Step 2: Decide how to EXPLOIT (i.e. not Waste) the System Constraint Step 3: SUBORDINATE everything to the above decision Step 4: ELEVATE the System Constraint Step 5: If the constraint was removed in previous steps, GO BACK to Step 1 Supply 12/hr Step 1 Identify the System Constraint 100% 100% $100m Potential for $100m Murphy / Common Cause Non-Value Add / Rework D B Constraint Downtime & Set-ups A Exploitation 60% Starvation/Blockage D C 60% $60m Current level of Current level of $60m Constraint Constraint Exploitation Exploitation 10 Step 5: Go back to Step 1 14/hr 12/hr 8/hr System Constraint Step 2 : Decide how to Exploit the System Constraint 11/hr Step 3: Subordinate everything to this decision New Constraint focused and aligned Policies & Metrics 15/hr Step 4: (Decide when and how to ) Elevate the System Constraint 120% $120m Potential for Constraint D Elevation 100% D $100m Murphy / Common Cause 80% $80m Demand 10/hr New level of Constraint Exploitation B C A

11 Part A Problem A1 a) Which is more complex: System A or System B? b) Explain why you claim this to be true? System A System B a) b) Please indicate your answer using a X next to the statement you believe is correct: System A is more Complex System B is more Complex Explain the reason for your above answer in the space provided below: 11

12 Part A Problem A2 a. What is the implication of the TOC definition of a complex system on the way TOC experts analyze, manage and improve complex systems? b. True or False Explain your answer: Any complex system is based on inherent simplicity and capitalizing on this fact is what enables incredible performance improvements within a short time. Answer to A2a: Answer to A2b: 12

13 Part A Problem A3 a. What are the 5 focusing Steps we use in TOC to achieve a Process of Ongoing Improvement? b. Explain how the 5 Focusing Steps specifically applied to managing a specific scenario: Answer to A3a: Answer to A3b: 13

14 Part A: Concept Review TOC is a systemic-based management approach Simple vs. Complex Systems Global vs. Local Improvement The Five Focusing Steps in POOGI Be able to: 1. Understand this improvement process 2. Apply this focusing process 14

15 Section B TOC Thinking Processes 15

16 Part B TOC Thinking Processes 16 What to Change? Identifying UnDesirable Effects (UDEs) within a System. Defining the Conflict that blocks us from removing the UDEs. To What to Change? Finding Injections that can resolve the Conflict. Identifying potential Negative Effects of a new Solution. Constructing the Cause-Effect or Negative Branches between the Solution and Predicted UDE. Finding Injections that can prevent or minimize the risk of the Negative Branch Reservation (NBR). How to Cause the Change? Identifying Implementation Obstacles for the new Injections. Determining the sequence of Intermediate Objectives (IOs) to be achieved to overcome these obstacles with a Prerequisite Tree (PRT) Construct a Detailed Roadmap via a Transition Tree (TRT) showing actions needed to overcome dependencies between successive IOs.

17 Part B TOC Thinking Processes System Evaluation & Overcoming Resistance to Change TOC uses a systematic approach based on the answers to 3 questions (change sequence) to analyze systems and overcome each of 6 layers of resistance using a set of logical thinking processes to get the buy-in and active collaboration from all the key stakeholders. WHAT TO CHANGE? Layer 1: Agree on the Core Problem and Constraint causing the Undesirable Effects. TO WHAT TO CHANGE? Layer 2: Agree on the Direction of the Solution to remove the Core Problem & better exploit and or elevate the physical system constraint. Layer 3: Agree the Proposed Solution will achieve the Desirable Effects and Strategic Objectives. Layer 4: Ensure that all significant Negative side-effects (1 st Yes, Buts...) have been surfaced and addressed. HOW TO CAUSE THE CHANGE? Layer 5: Ensure that all Obstacles (2 nd Yes, Buts...) to implementation have been surfaced and addressed in a detailed action plan. Layer 6: Overcome any Unforeseen inertia or unidentified obstacles, that will limit or prevent the change from occurring (Un-verbalized fear). 17

18 Part B TOC Thinking Processes System Evaluation TP Tools Step 0. System Goal & Definition Process Improvement Objective: NP and ROI Improvement Metrics: T, I, OE, CF Step 2. UDE Map & 3 UDE Conflict Cloud Process Step 3. Current Reality Tree & Core Conflict for Company Step 4. Identifying & Challenging the Core Conflict Conditions for Company Sales Finance Logistics R&D Supplier AREA Marketing UDE UDE1 UDE2 UDE 3 UDE 4 UDE5 Shareholder/Donor CASH Value Chain Reg Authorities Step 1. List of Undesirable Effects and Desirable Effects IMPACT Reduced Sales Increased Costs Increased Inventory & reduced cash Increased Time to Market Lead Time Reduced Sales DE DE1 DE2 DE3 DE4 DE5 Customer UDE 5 UDE 3 OBJ UDE 1 OBJ Sales UDE 2 UDE 1 OBJ NEED NEED NEED NEED NEED $$$ Costs Invest UDE 3 UDE 7 Tactic to prevent UDE Conflicting Tactic to Tactic prevent UDE Conflicting Tactic Tactic to prevent UDE UDE 6 UDE 4 UDE 5 Sales UDE 2 UDE 1 Tactics Strategy $$$ UDE 3 UDE 7 Costs Current Compromise UDE 6 Core Problem(s) GOAL Invest UDE 4 UDE 5 Tactics Strategy AREA GOAL Sales/ Finance Logistics R&D Marketing UDE UDE1 UDE2 UDE 3 UDE 4 UDE5 Strategy Strategy Conflict Conditions or Erroneous Assumptions OLD RULE Old Rule 1 Old Rule 2 Old Rule 3 Old Rule 4 Old Rule 5 DE DE1 DE2 DE3 DE4 DE5 Tactic Conflicting Tactic NEW RULE New Rule 1 New Rule 2 New Rule 3 New Rule 4 New Rule 5 Step 7. Strategic & Tactical Project Plan & Metrics for Company & Departments NEW RULES NEED Conflicting Tactic Step 6. PreRequisite Tree to overcome Implementation Obstacles GOAL Step 5. Future Reality Tree to achieve DE s and NBR s to prevent any negative consequences +$$ DE DE Next Step TECHNOLOGY TO SO DE New Metrics SO SO Project Objective Obstacle TO 18 SO SO TO New Rules/Tech Obstacle TO Obstacle DE DE New Rules DE DE DE DE PUDE New Technology

19 Section B Why Change? Defining the UDEs 19

20 Identifying Undesirable Effects (UDEs) of the System UnDesirable Effects (UDEs) are symptoms or negative effects that you and other stakeholders (e.g. your customers, shareholders etc) are currently experiencing. These effects are undesirable in relation to the goal of your defined system and its vision. Usually, people have very good intuition. When dealing with a system whose performance we want to improve, we engage our thinking about what can be done to make it better. As such, we tend to collect observations or complaints, from our own thoughts or what others say, that we believe are the major problems of the system. The best way (to analyze project management) is to ask people what is the problem? in the field of project management or what makes managing projects so difficult. Well people who are deeply involved in projects are experts in bitching and moaning. And they have good reasons for it. So ask them what really bothers them.. For example, let me show you a list that I got from a friend of mine, who had a lot of experience in projects: Original due dates are not met...there are too many changes...too often resources are not available when needed there are fights about priorities between projects there are budget over-runs there is too much re-work. Eli Goldratt, Goldratt Satellite Program, Session 3 - Project Management 20

21 Verbalizing the Undesirable Effects (UDEs) of the System Criteria for a Good UDE 1. It is a complete statement. (written in present tense) 2. It exists in current reality it is not a Predicted Undesirable Effect. 3. It is an effect, not a presumed cause, absence of solution or obstacle to implementing a solution. 4. A single effect, without an and, because or as a result of. 5. It is negative in its own right and can be quantified or at least qualified. 6. There is agreement that it is very important to neutralize or remove it (because it has a significant negative impact on Goal Units, necessary conditions, and global metrics T, I, and OE). 7. It does not blame anybody directly, but describes the undesirable effect being experienced. 21

22 Examples of UDEs that are NOT good enough No UDE Statement Good or Bad UDE? Why? (List criteria) Recommended Correction in UDE 1 Our Production manager is too strict. Bad Blame person, Not ve in its own right Many of our best people have resigned. 2 We don t have the budget to buy more machines. Bad Presumed Obstacle to acquire solution Our Due Date Performance < 80%. 3 Last year s bad weather lost us money. Bad Include presumed Cause & Effect. Is this an UDE or Fact of Life? Last year we lost money for 1 st time 4 Our management meetings are too long. Bad So what? Chupchik? What is impact on T, I and OE? Customers complain that they never see management. 5 We have a bad project management process. Bad Presumed Cause. Is it really a problem? More than 50% of our projects are late. 6 The no. of safety incidents have been increasing year-on-year. Good Can be improved by quantifying impact on T, I & OE Safety incidents costs us $150k pa in lost Throughput and $50k pa in additional costs 22

23 Part B TOC Thinking Processes 23 Problem B1 a) From the text below [Some of our customers are truly crazy!] identify at least three Undesirable Effects [UDEs] and the impact on the company (in terms of T, I and OE) b) For ONE of these UDEs, verbalize the associate conflict the person responsible for dealing with the UDE, is facing. Use your answer to Complete the Conflict Cloud template below. c) Identify at least 3 possible erroneous assumptions on any of the logical arrows d) Identify the injections that could invalidate these assumptions. Some of our customers are truly crazy! This quite surprising quote belongs to G.G. Gerald, the CEO of Remedy, a medium size manufacturer of drugs. Mr. Gerald referred to the increasing number of customer complaints. He said one of the complaints claimed that the company s sleeping pills caused some disturbing nightmares to the 70 years old woman who sent the complaint. As a result of the increase number of complaints, the company had to increase the number of people who took care of the complaints to meet the company s publicized one-week-at-most response time promise to every complaint. The company suffered a decrease in sales last year, but the CEO said that the sales are picking up due to the global reduction of 12% off the list price on all the products. The increasing sales helped, to some degree, the severe cash situation of the company. Mr. Gerald also explained the recent move to outsource the logistics of distributing the products to the drug stores to an external logistics service company. According to him managing the detailed transportations became quite difficult because the stores demanded too frequent replenishments and even demanded that the exact arriving time to the store be arranged and agreed one day ahead. There is no way for a truck driver to predict when he will arrive to a certain store. You all know the state of the traffic and how unpredictable it can be. This is an illogical request. From now on the stores would deal with our logistics service supplier that is large and strong and also transport many more products to the same stores and let s see whether they will request such stupid demands. I m truly sorry for our 25 or so employees who lost their job due to the outsourcing. I m aware that other employees feel uncomfortable about it and even concerned about their own job, but I had to take that difficult decision for the benefit of my company.

24 Part B TOC Thinking Processes Problem B1 a) From the text on previous slide (#23) [Some of our customers are truly crazy!], identify at least three Undesirable Effects [UDEs] and their impact on the company (in terms of change in T, I and OE) No Three Undesirable Effects from the Text Impact on Company (in T, I and OE)

25 Section B What to Change? Defining & Breaking Conflicts Define a problem precisely and you are half way to a solution 25

26 Part B TOC Thinking Process Logic Necessary Logic In order to,i must. Sufficiency Logic If,Then. Start my car Use a key I have a dog I have a pet In either case reversing the order of the entities creates an illogical statement 26

27 Part B TOC Thinking Processes The Conflict Cloud Defining a Problem Precisely Define a problem precisely and you are half way to a solution from What is this thing called Theory of Constraints? by Eli Goldratt (1990) Let s examine, what is the meaning of a problem. Intuitively, we understand that a problem exists whenever there is a GAP between our current reality and some desired objective. What limits us from solving this problem or closing the GAP? It must be that some unresolved conflict or compromise limits or blocks us from achieving the desired objective. Therefore, defining a problem precisely must start with a declaration of the desired objective and the conflict that limits or blocks us from Solving the problem. Unresolved Problem = Unresolved Conflict 27

28 Part B TOC Thinking Processes The Conflict Cloud A Q3: What is the Objective of the part that caused the UDE? B Q4: What need of the system would be satisfied by doing D (or would compromised if you took the action in D?) 28 D Q1: What action /rule most likely caused the UDE or you feel most pressure to take to deal with the UDE? D Defining a Problem as an Unresolved Conflict In TOC we believe that the reason you have labelled a situation as a problem or UDE (undesirable effect), is not only because it jeopardizes the goal of the system in some way, but also because it must put you in some sort of dilemma or conflict. Identifying this conflict not only will help us to understand the real problem (the unresolved conflict) but will also enable us to surface our intuition and/or assumptions about what is blocking us from dealing or removing the UDE. To convert a Problem or UDE is as simple as answering the following 5 questions: Q5: What system need is compromised by the UDE (or would be compromised if you took action in D)? C Q2: What action / rule could have prevented the UDE or is the opposite of what you feel pressure to do to deal with the UDE? Note: You can start with any of the questions; one possibility is to begin with the one that is easiest to answer and then complete the rest.

29 Part B TOC Thinking Processes Validating the Conflict Cloud A Manage Manage Operations Operations Well Well B Keep Keep cost/unit cost/unit as as low low as as possible possible C Reduce Reduce Inventory Inventory and and Lead Lead time time D Maximize Maximize batch batch size size D D Reduce Reduce batch batch sizes sizes Conflict Conditions: The conflict can exist due to: a) two conflicting rules or b) the constraint itself or c) both (a) and (b) The way to validate your conflict cloud is to answer the following questions: Is there a clear conflict between D and D? Is there no conflict between B and C? Does the existence of D Jeopardize C? 29 Does the existence of D Jeopardize B?

30 Part B TOC Thinking Processes Surfacing Conflict Cloud Assumptions The way to resolve/break conflicts without compromise is by identifying the erroneous assumption or creating an injection that will invalidate a legitimate assumption underlying one or more relationships between entity-pairs. Have any erroneous assumptions been surfaced in the dashed-lined boxes below? Large batch sizes allow managers to allocate equipment setup costs over more units so that costs per unit are minimized. Low cost per unit is a requirement for good operations management. A Manage Manage operations operations well. well. Low inventories and short lead times are associated with well managed operations. B Keep Keep cost/unit cost/unit as as low low as as possible. possible. C Reduce Reduce inventory inventory and and lead lead time. time. D Maximize Maximize batch batch size. size. D D Reduce Reduce batch batch sizes. sizes. It is not possible to maximize batch sizes while concurrently reducing batch sizes. Small batches provide for a reduction in both inventory and lead time. inventory and 30 lead time.

31 Part B - Poor Cloud Example What changes are needed to make this a well structured and valid conflict cloud? AB B Sales BD D Inventory A Profit DD AC C Cost CD D D Inventory 31

32 Part B TOC Thinking Processes The Conflict Cloud Problem B1 b) For ONE of your UDEs (see slide #24), record the associate conflict the person responsible for dealing with the UDE is facing. Use your answer to complete the Conflict Cloud template below. Be sure to surface a major assumption underlying each entity pair relationship. BB BD DD AB AA DD AC CC D D CD 32

33 Part B TOC Thinking Processes The Conflict Cloud Problem B1 c) List all major assumptions and indicate whether erroneous (E) or valid (V). d) Identify 1 injection that could invalidate at least one of the valid assumptions. Arrow (c) List all 5 major assumptions; Specify if erroneous (E) or valid (V) (d) Identify injection to overcome valid assumption or if erroneous, explain why. 33

34 Section B To What to Change? Negative Branch Reservations Every systemic solution has potential negative side-effects effects. 34

35 Part B TOC Thinking Processes The Negative Branch Reservation (NBR) The inventor of an new idea or solution also has the responsibility to ensure that the solution does not create new UnDesirable Effects (UDEs). This responsibility is manifested through two channels: 1. Preparation - thinking about and asking others for potential negative outcomes of the proposed solution. 2. Being capable of handling feedback from relevant Stakeholders and recognizing that their collaboration and buy-in is critical for the implementation of the solution. When these people raise their concerns and reservations (normally expressed as yes, BUTS), the inventor should be technically capable of converting the input into a process that addresses the concerns which TOC calls the Negative Branch Reservation. The NBR process is described below: Step 1: Use your own and others experience and intuition potential to identify undesirable effects of the new injections by answering what can go wrong? Step 2: Construct the detailed cause-effect relationships between the injection and the Potential UDE (PUDE) to validate the sufficiency logic Step 3: Identify how to trim the NBR by identifying where in the logic it turns the positive injection into a potential negative outcome. Step 4: Identify a potential additional injection to prevent or minimize the risk of this PUDE by preventing the condition that can cause the PUDE 35 YES Planned Desirable Effects Negative Branch Reservation BUT Predicted Undesirable Effects Implement a New Solution (Policy, Process or or Metric)

36 Part B TOC Thinking Processes The Negative Branch Reservation (NBR) Detailed process for creating a NBR 1. Write the injection in the bottom box 2. Use the space on the left to build a logical tree of why the injection will lead to the predicted negatives. Use the If then because logic 3. Write the possible negative outcome or Potential UDE (PUDE) in the top box. If you were constructing a Positive Branch for a FRT, then write the Desirable Effect or Strategic Objective you expect the injection to achieve. 4. Write your reasons or logic of why you claim the change will result in a negative (or positive outcome for positive branches) in the middle box. 5. Split the entities of the middle box into two groups - those that exist in the current reality and those that do not exist in the current reality but will once the injection will be implemented 6. Use the will-be entities in the back bone on the link between the injection and the negative outcome 7. Add the supporting entities using the If then because logic 8. Check for clarity and sufficiency 36 Potential Negative Outcome: Because: Injection:

37 Part B TOC Thinking Processes The Negative Branch Reservation Potential Negative Outcome: Throughput of of the the line line decreases and and overtime costs costs increase Because: Non-bottleneck resources adjusted their their life life based based on on receiving overtime payments THEN THEN Non-bottleneck resources, no no longer longer receiving overtime, will will probably be be pressured to to slow slow down down to to the the extent extent to to which which they they become a bottleneck and and must must work work overtime THEN The The company will will be be forced forced to to pay pay overtime (to (to protect protect customer satisfaction) and and suffer suffer lost lost throughput Injection: We We only only work work overtime on on the the bottleneck process (not (not on on any any of of the the other other non-bottleneck processes) to to reduce reduce overtime costs costs LOGIC OF NBR Assumption // Fact Fact One One way way to to ensure ensure overtime is is to to become a bottleneck Injection to prevent NBR Introduce new incentive based in increased T to share improvement equally Assumption // Fact Fact Non-bottleneck resources adjusted life life based based on on receiving extra extra overtime Assumption // Fact Fact To To increase capacity, only only need 37 need overtime on on bottleneck EFFECTS IN NBR Potential Undesirable Effect Effect Throughput decreases and and Overtime costs costs increase Intermediate Effect Effect Non-bottleneck resources will will have have to to take take actions actions to to ensure ensure they they receive receive overtime Intermediate Effect Effect We We don t don t have have to to work work overtime on on non-bottleneck processes Injection: We We only only work work overtime on on Bottleneck process

38 Part B TOC Thinking Processes The Negative Branch Reservation Problem B2 a) For the new Solution or Change defined below, list at least three potential negative consequences b) For the one with the largest potential negative impact on the company as a whole, construct the FULL negative branch using If-then-because logic c) Identify the assumption/fact [circle in red] that can be challenged and define an Injection [ to be written on diagram below selected assumption that is challenged] that can prevent the negative consequence. List of potential intermediate and overall negative consequences of: Laying off 10% of the employees across all the departments to achieve : cost reduction No. (a) Possible Negative Consequences of New Idea Motivation of those employees that remain will decrease and compromise customer service Inevitably, 10% will also be cut at the internal bottleneck which will reduce Co. Throughput by 10% If Throughput goes down by 10% and only salary costs go down by 10%, overall profits goes down. 38

39 Part B TOC Thinking Processes The Negative Branch Reservation Problem B2 b) For the one with the largest potential negative impact on the company as a whole, construct the FULL negative branch using If, and if, then logic. c) Identify the assumption/fact [circle in red] that can be challenged and define an Injection [written on diagram below selected assumption that is challenged] that can prevent the negative consequence. LOGIC EFFECTS Potential Undesirable Effect Effect Shareholders: Sales goes down Assumption // Fact Fact Intermediate Effect Effect Customers: Quality deteriorates Assumption // Fact Fact Morale impact the quality of output Intermediate Effect Effect Employees: Morale goes down Assumption // Fact Fact CEO do not tell remaining employees their jobs are safe New New Solution Solution / / Change Change (To (To reduce reduce costs costs by by 10%) 10%) we we decide decide to to lay-off lay-off 10% 10% of of employees employees in in all all departments 39 departments (to (to be be fair) fair)

40 Section B How to Cause a Change? The Prerequisite Tree 40

41 Part B TOC Thinking Processes The Prerequisite Tree A long journey needs its milestones implementing any new change or injection is not a trivial task. Let s not forget that typically after a TOC Analysis such as breaking a Core Conflict, at least one of the injections is a breakthrough, a departure from the currently prevailing tradition and achieving it can be considered an ambitious target. Thus, it is usually necessary to break the implementation task into smaller increments. Why is an ambitious target ambitious?...because the path to making it happen is an obstacle course! To prepare fully to understand and overcome this obstacle course, we use the Pre-Requisite Tree (PRT). This thinking process starts with the identification of the implementation obstacles that we expect we ll encounter (based on collective experience and intuition) and then we derive the necessary milestones the Intermediate Objectives (IOs) verbalized as outcomes - each needed to overcome the obstacles. To complete the process, the Intermediate Objectives need to be sequenced; which one is first, which ones can be accomplished in parallel, etc. The connections are provided by the fact that any time dependency is due to the need to overcome an obstacle. The power of the PRT stems from the fact that it doesn t ignore the obstacles, on the contrary, they are used as the main vehicle for building the sufficiency and sequence of the roadmap which will be the basis of the project network. 41

42 Part B TOC Thinking Processes The Prerequisite Tree (PRT) Pre-Requisite Tree (PRT) By relying on everybody s natural tendency and expertise at pointing out obstacles (why it will not be possible to implement a breakthrough idea), the Pre-Requisite Tree Thinking Process enables managers to systematically identify these major obstacles and the associated Intermediate Objectives necessary to overcome them. Then the manager is able to create a network showing the interdependencies between Intermediate Objectives or Steps to implement the new breakthrough solution. AMBITIOUS TARGET Injection 1 No Obstacle Intermediate Objective Who? INJECTION 1 INJECTION OBS 1.1 OBS 1.2 OBS 1.3 IO 1.1 IO 1.2 IO 1.3 AB BC AB OBS 1.1 IO 1.1 OBS 2.1 OBS 2.3 IO 2.1 IO OBS 1.4 IO 1.4 DE AMBITIOUS TARGET Injection 2 OBS 1.2 OBS 1.3 IO 1.2 IO 1.3 OBS 2.4 IO 2.2 OBS 2.2 No 2.1 Obstacle OBS 2.1 Intermediate Objective IO 2.1 Who? AB OBS 1.4 IO OBS 2.2 OBS 2.3 IO 2.2 IO 2.3 BC AB IO = Intermediate Objective 2.4 OBS 2.4 IO 2.2 DE OBS = Obstacle 42

43 Part B: TP Review Change Sequence: Answer Three Questions Resistance to Change UDEs, Conflict Clouds, and Injections Negative Branch Reservation Prerequisite Tree 43

44 Section C TOC Applications 44

45 Part C TOC Applications INTERNAL SUPPLY CHAIN LOGISTICS Managing Operations: Drum-Buffer-Rope Managing Supply Chain: TOC Replenishment FINANCE AND MEASUREMENTS Making decisions using T, I and OE Making decisions using Throughput / Constraint Unit PROJECT MANAGEMENT TOC Project Planning Rules: Critical Chain TOC Project Execution Rules: Buffer Management 45

46 Part C TOC Applications Internal Supply Chain Logistics Problem C1 INTERNAL SUPPLY CHAIN LOGISTICS Apply the TOC Five Focusing Steps to the situation diagrammed below which is a Make-to-Order environment for building Notebook Computers from Raw Material (RM) Buffers by answering explicitly the questions on the next slide. Average LT = 2 days A1 A2 A3 Stock of RM 3 (LT = 1 wk) Stock of RM 1 (LT = 2 wks) 20 units/hr 15 units/hr 17 units/hr Customer Demand = 12 units/hr C1 C2 C3 Stock of RM 2 (LT = 4 wks) B1 30 units/hr B2 25 units/hr Average LT = 1 day 10 units/hr 15 units/hr 20 units/hr Average LT = 3 days Finished Goods Warehouse 46

47 Part C TOC Applications Internal Supply Chain Logistics 47 Problem C1 INTERNAL SUPPLY CHAIN LOGISTICS Apply the TOC Five Focusing Steps to the situation diagrammed below which is a Make-to-Order environment for building Notebook Computers from Raw Material (RM) Buffers by answering as specifically as possible the questions below: 1. Where is the Bottleneck in this scenario and Why? 2. If you were to implement the Drum Buffer Rope system, where is the most appropriate location to position the DRUM and describe how it will work? 3. Where would you place Time and Stock BUFFERS? 4. How would you calculate the required Time and Stock BUFFERS? 5. In the diagram above, show the ROPE(s) and describe how it (they) will work?

48 Part C TOC Applications Internal Supply Chain Logistics Problem C1 INTERNAL SUPPLY CHAIN LOGISTICS Apply the TOC Five Focusing Steps to the situation diagrammed below which is a Make-to- Order environment for building Notebook Computers from Raw Material (RM) Buffers by answering as specifically as possible the questions on the previous slide (#47): RM 1 RM 2 Stock Buffer = 800 units (400 x 2 wks) RM 2 RM 2 Stock Buffer = 1600 units (400 x 4 wks) Time Buffer = 1 day =50% of Avg LT of 2 days A1 A2 A3 20 units/hr 15 units/hr 17 units/hr B1 30 units/hr B2 25 units/hr Time Buffer = 0.5 day or 4hrs = 50% of Avg LT of 1 day C1 RM 3 Bottleneck 10 units/hr RM 3 Stock Buffer = 400 units (400 x 1 wk) C2 C3 15 units/hr 20 units/hr Weekly Demand/Supply = 10 units/hr x 8 hrs/day x 5 days/wk = 400 units/wk Finished Goods Warehouse Customer Demand = 12 units/hr Shipping Buffer = 1.5 days or 12hrs = 50% of Avg LT of 3 days ROPE RM # Job # Date RM1 Job 1 Mon 8:00 RM2 Job 1 Mon 12:00 Etc. ROPE = DRUM Date Time Buffer DRUM Job # Date Job 1 Tue 8:00 Job 2 Tue 12:00 Etc. DRUM = Due Date Shipping Buffer Orders Order # Date Order 1 Wed 12:00 Order 2 Wed 16:00 Etc. 48

49 RM 1 RM 2 Stock Buffer = 800 units (400 x 2 wks) Part C TOC Applications Internal Supply Chain Logistics RM 2 RM 2 Stock Buffer = 1600 units (400 x 4 wks) Time Buffer = 1 day =50% of Avg LT of 2 days A1 A2 A3 20 units/hr 15 units/hr 17 units/hr B1 30 units/hr B2 25 units/hr C1 RM 3 Bottleneck 10 units/hr C2 C3 15 units/hr 20 units/hr Time Buffer = 0.5 day or 4hrs = 50% of Avg LT of 1 day Shipping Buffer = 2.5 days = 50% of Avg LT of 5 days Problem C1 INTERNAL SUPPLY CHAIN LOGISTICS Apply the TOC Five Focusing Steps to the situation diagrammed below which is a Make-to- Order environment for building Notebook Computers from Raw Material (RM) Buffers by answering as specifically as possible the questions on the slide #47: RM 3 Stock Buffer = 400 units (400 x 1 wk) Weekly Demand/Supply = 10 units/hr x 8 hrs/day x 5 days/wk = 400 units/wk Finished Goods Warehouse Customer Demand = 12 units/hr ROPE RM # Job # Date RM1 Job 1 Mon 8:00 RM2 Job 1 Mon 12:00 Etc. ROPE = DRUM Date Time Buffer DRUM Job # Date Job 1 Tue 8:00 Job 2 Tue 12:00 Etc. DRUM = Due Date Shipping Buffer Orders Order # Date Order 1 Wed 12:00 Order 2 Wed 16:00 Etc. 49

50 Part C TOC Applications Internal Supply Chain Logistics Problem C1b TOC Distribution and Replenishment 1) Identify the key ideas associated with the generic TOC Distribution and Replenishment solution. 2) True or False - Explain your answer: The key metric in implementing the TOC D&R solution is throughput dollar days. 50

51 Part C TOC Applications Finance & Measurements TOC Global Measurements: Throughput (T): The rate at at which a system generated money (or goal units) through sales. Inventory (I): All money used to to purchase things that the system intends to to sell. Operating Expense (OE): All money spent by by the system to to turn Inventory into Throughput. 51

52 Part C TOC Applications Finance & Measurements TOC Financial Measurements: Throughput: T = SR --VC Net profit: NP = T --OE Return on on investment: ROI = (T (T--OE) // II Cash flow: Cash inflows cash outflows (in (in terms of of changes in in T, T, I I and OE) Productivity: T/OE Investment Turns: T/I T/I Preferential Products: Highest T/Cu 52 TOC Productivity Measurements:

53 Part C TOC Applications Finance & Measurements Problem C2 FINANCE and MEASUREMENTS What is the maximum weekly profit you can make from the company described below? (Show your assumptions and calculations). Situation Product P Product Q Weekly Demand 100 units 50 units Selling Price per Unit $90.00 $ Variable Cost per Unit $45.00 $40.00 Allocated Overhead per Unit $40.00 $35.00 This table shows the processing time per unit of each product/service on each resource. Assume that each type of resource (i.e. person, machine, and department) works one 8-hour shift five days a week (2400 minutes). Assume that setup time is zero, that quality is perfect and that the resources are always available during work hours (no breaks or downtime). In addition, our weekly operating expenses (overhead and labor costs) are $6000. Finally, we can sell up to the amount of weekly demand for each product (will make the sale for all products/services made if they are less than or equal to the weekly demand). The customers will buy from our competitor if we are not able to meet their demand. If we make more, we can not sell more. Product P Product Q Resource A 15 min. 10 min. Resource B 15 min. 30 min. Resource C 15 min. 5 min. Resource D 15 min. 5 min. 53

54 Part C TOC Applications Finance & Measurements Problem C2 FINANCE and MEASUREMENTS What is the maximum weekly profit you can make from the company described below? (Show your assumptions and calculations). Financial Model Product P Product Q Unit Total Unit Total Demand per Week Supply per Week Sales Value $90 $9,000 $100 $5,000 $14,000 Variable Cost $45 $4,500 $40 $2,000 $6,500 Throughput $45 $4,500 $60 $3,000 $7,500 Operating Expenses $6,000 Net Profit $1,500 Throughput/C Min $3 $2 Capacity Model Scenario 1: Ignoring Supply Capacity Constraint Product P Product Q TVA/Min Utilization Min/Unit Total Min/Unit Total Total P Q Resouce A % $3 $6 Resouce B % $3 $2 Resource C % $3 $12 Resource D % $3 $12 Totals Available Capacity Total

55 Part C TOC Applications Finance & Measurements Problem C2 FINANCE and MEASUREMENTS What is the maximum weekly profit you can make from the company described below? (Show your assumptions and calculations). Scenario 2: Preferring Q based on highest Margin Financial Model Product P Product Q Unit Total Unit Total Demand per Week Supply per Week Total Sales Value $90 $5,400 $100 $5,000 $10,400 Variable Cost $45 $2,700 $40 $2,000 $4,700 Throughput $45 $2,700 $60 $3,000 $5,700 Operating Expenses $6,000 Net Profit -$300 Throughput/C Min $3 $2 Capacity Model Product P Product Q TVA/Min Utilization Min/Unit Total Min/Unit Total Total P Q Resouce A % $3 $6 Resouce B % $3 $2 Resource C % $3 $12 Resource D % $3 $12 Totals Available Capacity

56 Part C TOC Applications Finance & Measurements Problem C2 FINANCE and MEASUREMENTS What is the maximum weekly profit you can make from the company described below? (Show your assumptions and calculations). Financial Model Product P Product Q Unit Total Unit Total Demand per Week Supply per Week Sales Value $90 $9,000 $100 $3,000 $12,000 Variable Cost $45 $4,500 $40 $1,200 $5,700 Throughput $45 $4,500 $60 $1,800 $6,300 Operating Expenses $6,000 Net Profit $300 Max Profit = $300 Throughput/C Min $3 $2 Capacity Model Scenario 3: Preferring P based on Highest T/C min Product P Product Q TVA/Min Utilization Min/Unit Total Min/Unit Total Total P Q Resouce A % $3 $6 Resouce B % $3 $2 Resource C % $3 $12 Resource D % $3 $12 Totals Available Capacity Total

57 Part C TOC Applications Critical Chain Project Management Rules Traditional Project Network with Critical Path A-14 B-10 C-16 D-20 C-16 E-20 Critical Chain Project Network 1. Resolve Resource Contention 2. Identify Critical Chain 3. Insert Project Buffer (50% of Critical Chain Path LT) 4. Insert Feeding Buffers (50% of Feeding Path LT) LT = 60 days A-14 B-10 C-16 D-20 C-16 E-20 LT = 72 days A-7 B-5 FB-6 C-8 D-10 C-8 E-10 PB LT = 54 days

58 Part C - TOC Applications TOC application problems often require a number of steps to arrive at the correct answer. Often problems have several parts and some answers depend, in part, on answers to previous questions. The arithmetic is usually simple, but errors are common. Make sure to show work so partial credit can be given where applicable. Key Points: Always show your work because if you fail to get the right answer, but show your work, you may still get partial credit. Check your arithmetic. 58

59 Part C TOC Applications Review Supply Chain Logistics and Operations Finance and Measurement Project Management 59

60 Time for your Questions? 60

61 Summary of Key Insights THEORY OF CONSTRAINTS The Focusing & Synchronization Mechanism to Achieve Breakthrough Performance 61

62 Summary of Key Insights Common Question How do we identify the System Constraint? We can follow three different approaches to assess whether the constraint is internal or external: 1. Develop a model to determine if demand is < or > supply. 2. If demand > supply, then interview key people in the internal supply chain to identify where Throughput is getting stuck (build-up up of WIP). 3. Using Cause-Effect Analysis to identify the Constraint by determining what Symptoms or Undesirable Effects key stakeholders are complaining about (See the Constraint Identification Matrix on the next slide for an example of approach 3.) 62

63 Summary of Key Insights Constraint Identification Matrix 63 Select the set of symptoms with which you most closely identify: Reluctance to take on new business Poor factory on-time performance and long lead times Frequent back orders or Lost Sales High WIP and/or finished goods inventory High overtime Lots of expediting and rescheduling Wandering or stationary bottlenecks Operations Projects regularly over budget. Improvement Projects not adding value Research & Development take too long to be considered a competitive advantage Projects regularly exceed expected Lead Time Chaotic reprioritization and midnight oil-burning to meet project due dates Reluctance to take on new projects Takes too long to develop, launch new products Difficulty in attracting & retaining customers Losing Market Share to Competitors Pressure on pricing and the need to compete on price Frequent consideration of downsizing due to excess capacity relative to demand We do not have a sustainable competitive advantage Market demand is (much) less than Capacity Inability sell to all customers that could benefit from your products or services Project Management Marketing & Sales Too many late or partial shipments to customers Frequent emergency shipments to branches or clients Excess finished goods of some products Frequent periods of high demand on production Excess returned goods from your channel Reluctance to take on new Business High number of Credit notes Not able to quantify impact of improvements on bottom line Measurements not providing good Early Warning mechanism or seem in conflict with others Takes too long to get together data to make decisions & can t trust the numbers Not all employees behaving in line with company Goal Too much bureaucracy A "keep your head down" mentality Lack of initiative & out-of-the-box thinking Reluctance to review what we do Unclear vision and direction "Can't do" & Finger pointing attitudes Defensive attitudes - questions and concerns perceived as attacks Lack of clarity of roles and regular Conflicts Many improvement project but few ever completed Distribution Finance & Measurement Strategy & Organizational Culture

64 THEORY OF CONSTRAINTS SUMMARY OF BASIC PRINCIPLES Physical View of System Weakest Link Fact 1: To understand any System (such as human based organizations), we need to understand three parts: The Goal, the Physical side and Logical side. Fact 2: Very Few factors govern the performance of the Physical and Logical parts of a system at any point in time (the law of the weakest link & significant few) Fact 3: Unresolved Strategic and Tactical Conflicts can limit or block us from exploiting, protecting and overcoming physical and logical constraints. Flow of Goal units Logical View of System Effect Effect Effect THEORY OF CONSTRAINTS provides tools to assist management to find the few physical and logical leverage point(s) of the system (organisation) where an improvement can cause a quantum improvement for the system as a whole. THEORY OF CONSTRAINTS provides the tools to assist managers to build the few physical & logical lever(s) - the new rules/metrics -and resolve conflict(s) to focus & synchronize the whole organization according 64 to better exploiting the few leverage points. Tactic Strategic Obj #1 Unresolved Conflict Erroneous Assumption? GOAL Conflicting Tactic Strategic Obj #2 Effect Root Cause Cause Effect Flow of Cause-Effect

65 SUMMARY OF IMPORTANT TOC INSIGHTS products/services with the highest The performance of any system is limited by the performance of the weakest link or constraint.. Therefore, to improve the performance of the system, we must first improve the performance of the weakest link or constraint. 2. Constraints governs not only the rate of Throughput but also the level of Inventory. 3. To achieve a focused Process of Ongoing Improvement,, we should follow the following 5 Focusing Steps Process: Step 0: Agree on the SYSTEM GOAL (and its metrics) Step 1: Step 2: Step 3: Step 4: Step 5: IDENTIFY the System Constraint Decide how to EXPLOIT the System Constraint SUBORDINATE everything else to the above decision ELEVATE the System Constraint If a Constraint has been broken in a prior step, GO BACK to Step 1. To exploit the Constraint, we must focus on those products/services with the highest Throughput$/Constraint unit.

66 SUMMARY OF IMPORTANT TOC INSIGHTS All problems (gap between goal and reality) are the result of a unresolved conflict.. To truly solve the problem,, we must find a way to break the conflict without compromise; often clouds help identify effective solutions. 7. The conditions that cause conflicts often stem from conflicting rules/metrics and or erroneous assumptions. 8. Therefore, when we see Bad behavior (which results in less goal units), most likely it stems from a Bad policy or measurement. The fastest and most reliable way to change bad behavior is to change the policy/metric that caused it 9. Where ever we get stuck in the Five Focusing Step process, we can use the Thinking Processes such as the Conflict Cloud to identify what old rules or metrics to change to achieve the needed synchronization (what( we must STOP doing) ) and use TOC and other Improvement Tools such as the tools from DMAIC (Six Sigma) and LEAN to identify what the new rules or metrics should be (what( we must START doing). 10. There are some common erroneous assumptions managers make to deal with complexity that could result in conflicting rules and measurements which TOC have identified (such as An idle resource is a major waste ) 11. The only way to judge the impact of a local change, it to judge it based b on the impact it will have on the System as a Whole (impact on Sales, Costs, Inventory and Investment or T, OE and I)