TOC Fundamentals Exam Review Session

Transcription

1 TOC Fundamentals Exam Review Session Presented By: Richard A. Reid, Jonah, PhD Professor Emeritus of Operations Management Anderson Schools of Management, University of New Mexico, USA Date: June 7, 2009 Acknowledgement: This presentation is based on previous presentations by Alan Barnard, C. Grant Lindsay, Vicky Mabin, Richard A. Reid, and Thomas Shoemaker, and is used with their permission. 1

2 About Richard A. Reid Richard A. Reid recently retired from the University of New Mexico where he taught systems thinking, operations management, and operations research for 34 years. He received a BSME from Case Western Reserve University, and an MBA and Ph.D in Systems Research from Ohio State University. Dr. Reid enjoys applying conceptual frameworks such as TOC TP to performance improvement opportunities in both the manufacturing and service sectors with students in the classroom and when consulting with organizational managers. He has written one book, three chapters in other books, and has published over 125 articles in referred national and international journals. 2

3 FE Workshop Overview My Focus Review fundamental TOC concepts Make suggestions for becoming a successful examinee Review some sample exam questions Answer all your questions Your Responsibility Provide feedback on improving i review sessions 3

4 What is the Theory of Constraints? Theory of Constraints provides a holistic set of processes and criteria, all based on a 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 (decisions, changes) that will SYNCHRONIZE the parts to achieve an ongoing & significant improvement in the performance of the system as a whole. THEORY OF CONSTRAINTS After more than 30 years of Development and Evolution Part 1 Five 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. Generic templates for success exist. 3. Customizing & applying templates. NOTE - Items below dashed line are not on Fundamentals Exam. 4

5 Fundamentals Exam The Fundamentals Exam (FE) seeks to ascertain your knowledge and understanding of basic TOC tools and concepts. The FE format is currently undergoing g a change from T/F: Explain? & open- ended queries to all-multiple choice questions. Some requirements for successfully completing the FE include: 1. Knowledge of the philosophy and steps in TOC improvement approaches/processes. 2. Understanding of basic TOC principles, concepts, and tools. 3. Application of TOC improvement approaches 5 and tools to specific scenarios.

6 Fundamentals Exam Outline Part A TOC Fundamentals (~35%) Inherent Simplicity: Can systems be both simple and complex? Improvement Focus and Metrics: Global vs. Local Applying the Five Focusing Steps for Constraint Management Part B TOC Thinking Processes (~25%) The Change Sequence: Answering Three Questions UDEs, Conflicts and Injections Negative Branch Reservations Part C TOC Applications (~40%) Internal Supply Chain Logistics and Operations Management Finance and Measurement Critical Chain Project Management Layers of Resistance to Change 6

7 Section A TOC Fundamentals 7

8 Part A TOC Fundamentals Complexity Sample Question Question Which is more complex: System A or System B? Answer: It depends on your definition of COMPLEXITY. Traditionally the more complex that the system is, the more data elements that are needed to describe it. Managerially the more complex that the system is, the more points a manager must touch to control or impact it. System A System B 1. 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 X 2. Explain the reason for your above answer in the space provided below: System A has 4 independent entities that must be controlled and we have no idea as to any relationship(s) between them. In System B, the arrows suggest that we know the relationships between the various entities, so if we have reliably mapped the relationships, then it should be easier to manage. 8

9 Part A TOC Fundamentals TOC Metrics Global Measurements Throughput (T): The rate at which a system generated money (or goal units) )through hsales. Inventory/Investment (I): All money used dto purchase things that the system intends to sell. Operating Expense (OE): All money spent by the system to turn Inventory into Throughput. Financial Throughput: T = SR - VC Net profit: NP = T - OE Return on Investment: ROI = (T - OE) / I Operational Productivity: T / OE Investment/Inventory Turns: T / I Preferential Products: Highest T / Constraint minute 9 (*assuming one resource constraint)

10 Part A TOC Fundamentals Five Focusing Step Process For Breakthrough and Continuous Improvement (POOGI) First: Agree on the System, the GOAL and performance 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 else (non-constraints) to above decision Step 4: ELEVATE (eliminate) the System Constraint Step 5: Beware of inertia! GO BACK to Step 1 Supply 12/hr Step 1 Identify the System Constraint 14/hr 12/hr 8/hr System Constraint Step 2 : Decide how to Exploit the System Constraint 100% 100% Potential for $100m Murphy / Common Cause Non-Value Add / Rework Constraint Downtime & Set-ups Exploitation 60% Starvation/Blockage Current level of Constraint Exploitation 60% $60m Current level of Constraint Exploitation 11/hr Step 3: Subordinate everything to this decision New Policies & Metrics are Used to Manage Non- Constraints Aligning their Performance to the Constraint /hr 120% 100% 80% Demand 10/hr Step 4: (Decide when and how to ) Elevate the System Constraint Potential for Constraint Elevation Murphy / Common Cause New level of Constraint Exploitation Step 5: Go back to Step 1

11 Part A: Concept Summary TOC s Managerial Foundation is in Systems-Thinking Always seek to improve the performance of the total system Seek the Inherent Simplicity in a Complex System If understood, seemingly complex systems are basically simple Need to Make Global (Not Local) Improvements Think systemically, but be able to act locally Do not sub-optimize your total system The Five Focusing Steps in POOGI You must be able to: Understand why focus is necessary for global improvement Apply this focusing process to a given scenario 11

12 Part A TOC Fundamentals Sample Questions Questions 1. The three major methods of continuous improvement are (1) theory of constraints, (2) lean, and (3) six sigma. When used in combination to improve an organization s overall performance, they are most effective if each assumes the following role: a. TOC provides the focal point for improvement, lean minimizes process variability, and six sigma reduces waste. b. TOC provides the focal point for improvement, lean minimizes waste, and six sigma reduces process variability. c. TOC provides the strategy and tactics, lean minimizes process variability, and six sigma reduces waste. d. TOC provides the strategy and tactics, lean maps the value stream, and six sigma reduces defects. 2. According to TOC, when a constraint is internal management should evaluate product mix decisions based on: a. The product with the highest profit margin (T-OE). b. The product with the lowest unit cost. c. The product with the least activity-based cost allocation. d. The throughput per product generated per unit time on the constraint (T/CU). 12

13 Section B TOC Thinking Processes 13

14 Part B TOC Thinking Processes (TP) The Change Sequence What to Change? Use EC, CCC & CRT Identify y UnDesirable Effects (UDEs) that exist within the system. Use Current Reality Tree (CRT) to logically link UDEs to root cause(s) often shown as Evaporating Clouds (ECs or CCC) at CRT base. To What to Change? Use FRT & NBR Identify set of Injections that can resolve the EC or CCC. Use Future Reality Tree (FRT) to logical show that most/all UDEs are replaced by Desirable Effects (DEs). Identify any potential ti new UDEs caused by a planned injection and construct cause-effect Negative Branch Reservation (NBR). Specify additional injection(s) that can prevent NB from occurring. How to Cause the Change? Use PRT & TT 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. 14

15 Part B TOC Thinking Processes (TP) 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. Layer 2: Agree on the Direction of the Solution to remove the Core Problem & better exploit and or elevate the physical system constraint. TO WHAT TO CHANGE? 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). 15

16 Part B TOC Thinking Processes Two Types of Logic Necessity 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! 16

17 Part B TOC Thinking Processes Verbalizing Undesirable Effects (UDEs) Criteria for a Good UDE It is a complete statement. (written in present tense) It exists in current reality it is not a Predicted Undesirable Effect. It is an effect, not a presumed cause, absence of solution or obstacle to implementing a solution. A single effect, without an and, because or as a result of. It is negative in its own right and can be quantified or at least qualified. 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). It does not blame anybody y directly, but describes the undesirable effect being experienced. 17

18 Part B TOC Thinking Processes Conflict Cloud Sample Question Question 1) Given a storyline or scenario, identify a conflict the person responsible for dealing with the storyline is facing. Use your answer to complete the Conflict Cloud template below. 2) Surface one assumption underlying each entity pair relationship. 3) Provide an injection to break the conflict. D - A A B B B D D DD A- B- A C C C D D C- D - 18

19 Part B TOC Thinking Processes 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 Inventory entity statements assumptions underlying entity relationships 19

20 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. Large batch sizes allow managers to allocate equipment setup costs over more units so that costs per unit are minimized. Low production cost per unit is the main performance measure we use for good operations management. A Manage operations well. Low inventories is the second main performance measure we use for good operations management. B Keep production cost/unit as low as possible. C Reduce inventory. D Increase batch size. D Reduce batch sizes. It is not possible to increase batch sizes while concurrently reducing them, because the batch size has to be fixed/chosen at one level. Note: Don t justsay say there is a conflict. Say why in the assumption. Small batches provide for a reduction in both inventory and lead time. Have any erroneous or weak assumptions been surfaced in the dashed-lined boxes? 20

21 Part B TOC Thinking Processes Validating the Conflict Cloud A Manage Operations Well B Keep production cost/unit as low as possible C Reduce inventory levels D Increase batch size D Reduce batch size Conflict Conditions: The conflict can exist due to: a) two conflicting rules or b) the constraint t itself or c) both (a) and (b) Validate your conflict cloud by answering the following questions: Is there a clear conflict between D and D? D? Is there no conflict between B and C? Does the existence of D Jeopardize C? or Does the existence of D Jeopardize B? 21

22 Part B TOC Thinking Processes The Negative Branch Reservation (NBR) The inventor of a 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 recognize this as a situation which TOC calls the Negative Branch Reservation (NBR). 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 Negative Branch Reservation Predicted Undesirable Effects Implement a New Solution (Policy, Process or Metric) BUT 22

23 Step 2 Part B TOC Thinking Processes Example Negative Branch Reservation Potential Undesirable Effect 1. Use the space to the right to build a logical tree of why the proposed action will lead to the predicted d negative. Use Intermediate Effect If then because logic 2. Use the will-be entities in the Assumption / Fact back bone on the link between the injection and the negative outcome 3. Add supporting entities (assumptions/facts) using the If then because logic Assumption / Fact Intermediate Effect 4. Check for clarity and sufficiency Assumption / Fact Proposed Action 23

24 Part B TOC Thinking Processes Trimming the NBR The inventor/practitioner should be technically capable of converting the input into a process that addresses the concerns which TOC calls: Trimming the Negative Branch Reservation. Step 3: Identify how to trim the NBR by identifying where in the logic the positive injection turns into a potential negative outcome. Step 4: Identify a potential additional injection to prevent or minimize the risk of a PUDE by preventing the condition that can cause the PUDE. NOTE: This PUDE may not be the one mentioned first. It s the first negative effect encountered as you read up the branch. Step 5: Rework the branch until no negative entities remain. Planned Desirable Effects Logical and New Injection Negative Branch Reservation Predicted Undesirable Effects Stop Implement a New Solution (Policy, Process or Metric) 24

25 Part B TOC Thinking Processes NBR Sample Question Question 1) For the new Solution or Change defined below, list at least three potential negative consequences 2) 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 3) Identify [circle] the assumption/fact that can be challenged and define an Injection [selected assumption should be written on diagram below] that can prevent the negative consequence. Proposed Solution Lay off 10% of the employees across all the departments to achieve cost reduction Motivation of those employees that t remain will decrease and compromise customer service Inevitably, 10% will also be cut at the internal No. Possible bottleneck Negative which Consequences will reduce Co. of Throughput New Idea by 10% 1) List of potential intermediate and overall negative consequences of the new solution. 1 2 Shareholders: Sales go down If Throughput goes down by 10% and only salary costs go down by 10%, overall profits goes down. Customers: Quality deteriorates 3 Employees: Morale goes down 25

26 Part B TOC Thinking Processes NBR Sample Answer Question 2) 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. 3) Identify [circle] the assumption/fact that can be challenged and define an Injection [selected assumption should be written on diagram below] that can prevent the negative consequence. Potential Undesirable Effect Shareholders: Sales do not go down Assumption / Fact Quality impacts sales volume Intermediate Effect Customers: Quality does not deteriorates Assumption / Fact Morale impacts the quality of output Intermediate Effect Employees: Morale Does not go not down Assumption / Fact CEO does not tell remaining employees their jobs are safe New Solution / Change (To reduce costs by 10%) we decide to lay-off 10% of employees in all departments (to be fair) 26 New injection: CEO widely disseminates layoff process details & reassures remaining employees

27 Part B: TP Concept & Tool Summary Three Steps in the Change Sequence Six Layers of Resistance to Change Two Types of Logic: Necessity and Sufficiency Clearly Written Undesirable Effects (UDEs) Conflict Clouds: Creating and Validating Negative Branch Reservations: Creating and Trimming 27

28 Part B TOC Thinking Processes Sample Questions Questions 1. With regard to strategy and tactics tree diagrams, the three types of assumptions are: a. underlying, fundamental, and causal. b. parallel, necessary, and sufficient. c. primary, secondary, and critical. d. serial, necessary, and conditional. 2. Besides logically demonstrating that a set of injections produces desired effects (DEs), it is possible that the injection set could result in a new undesirable effect (UDE) ; this is known as: a. a category of legitimate reservation. b. a future reality tree. c. an obstacle to be overcome during implementation. d. a negative branch reservation. 28

29 Section C Applications of TOC 29

30 Part C TOC Application Summary INTERNAL SUPPLY CHAIN LOGISTICS Managing Operations: Drum-Buffer-Rope Managing Supply Chains: TOC Replenishment FINANCE AND MEASUREMENTS Making decisions using T, I and OE Making decisions i using Throughput h / Constraint t Unit PROJECT MANAGEMENT TOC Project Planning Rules: Critical Chain TOC Project Execution Rules: Buffer Management 30

31 Part C TOC Applications DBR Sample Question Question INTERNAL SUPPLY CHAIN LOGISTICS Apply the TOC Operations concepts to the situation diagrammed below which is a make-to-order environment for building Notebook Computers from Raw Material (RM) stocks by answering the questions that follow as specifically as possible. 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 Bottleneck Average LT = 3 days Finished Goods Warehouse 31

32 Part C TOC Applications DBR Sample Answer Question INTERNAL SUPPLY CHAIN LOGISTICS 1. Where is the Bottleneck in this scenario and Why? Stock of RM 3 (LT = 1 wk) RM 1 Stock of RM 1 (LT = 2 wks) RM 2 Stock of RM 2 (LT = 4 wks) A1 A2 A3 20 units/hr 15 units/hr 17 units/hr B1 30 units/hr B2 25 units/hr RM 3 C1 C2 C3 10 units/hr Bottleneck 15 units/hr 20 units/hr Finished Goods Warehouse Customer Demand = 12 units/hr C1 is the bottleneck workstation because it produces the fewest units per hour (10) and that t rate is less than the rate of customer demand d (12). 32

33 Part C TOC Applications DBR Sample Answer Question INTERNAL SUPPLY CHAIN LOGISTICS 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? DRUM Stock of RM 3 (LT = 1 wk) RM 1 Stock of RM 1 (LT = 2 wks) RM 2 Stock of RM 2 (LT = 4 wks) A1 A2 A3 20 units/hr 15 units/hr 17 units/hr B1 30 units/hr B2 25 units/hr RM 3 C1 C2 C3 10 units/hr Bottleneck 15 units/hr 20 units/hr Finished Goods Warehouse Customer Demand = 12 units/hr Position the drum at C1 (the bottleneck). It will dictate (pace) the production rate of the entire system to 10 units per hour. In particular, C2 and C3 will be governed by limited flow from C1 and the A and B lines will be controlled by ropes from C1 to their respective RM stocks. 33

34 Part C TOC Applications DBR Sample Answer Question INTERNAL SUPPLY CHAIN LOGISTICS 3. Where would place the Time and Stock Buffers? 4. How would you calculate the required Time and Stock Buffers? Time Buffer = 1 day =50% of Avg LT of 2 days RM 3 Stock Buffer = 400 units (400 x 1 wk) A1 A2 A3 RM 1 RM 1 Stock Buffer 20 units/hr 15 units/hr 17 units/hr Bottleneck = 800 units (400 x 2 wks) C1 C2 C3 B1 B2 10 units/hr 15 units/hr 20 units/hr RM 2 Stock Buffer = 1600 units (400 x 4 wks) RM 2 30 units/hr 25 units/hr Time Buffer = 0.5 day or 4hrs = 50% of Avg LT of 1 day RM 3 Finished Goods Warehouse Customer Demand = 12 units/hr Shipping Buffer = 1.5 days or 12hrs = 50% of Avg LT of 3 days Three time buffers should be created: (1) A line upstream from C1, (2) B line also upstream from C1, (3) Shipping buffer directly upstream from FG Warehouse. Also three stock buffers at RM1, RM2, and RM3 are needed 34

35 Part C TOC Applications DBR Sample Answer Internal Supply Chain Logistics Question INTERNAL SUPPLY CHAIN LOGISTICS 5. In the diagram above, show the ROPE(s) and describe how it (they) will work? RM 1 A1 A2 A3 20 units/hr 15 units/hr 17 units/hr RM 3 Bottleneck Finished Goods Warehouse RM 2 B1 30 units/hr B2 25 units/hr C1 C2 C3 10 units/hr 15 units/hr 20 units/hr Customer Demand = 12 units/hr Ropes from bottleneck to RM1 & RM2 stock buffers will control the release of materials to A & B lines, respective, thereby avoiding the accumulation of excess WIP. Possible ropes from the customer demand to the bottleneck and each stock of raw materials would indicate if demand decreased significantly. 35

36 Part C TOC Applications Buffer Concepts Don t confuse stock and time buffers! Stock Buffer is units Time Buffer is duration (hours, days, etc) Ask: Has it arrived? Green first 1/3 of buffer; normal situation Yellow center 1/3 of buffer; check progress Red final 1/3 of buffer = buffer penetration; action required Alternate Terminology Caution Some authors use for G - Y- R Some authors use 3-2-1for G - Y- R For an excellent discussion of buffers, refer to Dr. Youngman s website 36

37 Part C TOC Applications Finance & Measurements Question FINANCE and MEASUREMENTS What is the maximum weekly profit you can make from the company described below? (Show your assumptions and calculations). l 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 t 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. 37

38 Part C TOC Applications Finance & Measurements Question FINANCE and MEASUREMENTS What is the maximum weekly profit you can make from the company described below? (Show your assumptions and calculations). Scenario 1: : (a) Ignoring Resource B as a Capacity Constraint and (b) Fulfilling all Demand Financial Model Product P Product Q Unit Total Unit Total Demand per Week Supply per Week Total 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 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

39 Part C TOC Applications Finance & Measurements Question FINANCE and MEASUREMENTS What is the maximum weekly profit you can make from the company described below? (Show your assumptions and calculations). Scenario 2: : (a) Accept Resource B as a Capacity Constraint and (b) Maximize Production of Product Q because it has the Highest Per Unit Margin ($60 60.) 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

40 Part C TOC Applications Finance & Measurements Question FINANCE and MEASUREMENTS What is the maximum weekly profit you can make from the company described below? (Show your assumptions and calculations). Scenario 3: : (a) Accept Resource B as a Capacity Constraint and (b) Maximize Production of Product P because it has the Highest Throughput Per Constraint Minute($3.) Financial Model Product P Product Q Unit Total Unit Total Demand per Week Supply per Week Total Note: This rule only works when there is just one resource constraint. 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 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 2400

41 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. Lay out network as for Traditional Project network (see above) Lead Time (LT) = = 60 days 2. Resolve all Resource Contentions (2 tasks using Res. C are sequenced) 3. Identify Critical Chain A-14 B- 10 D-20 C-16 C-16 E-20 Lead Time (LT) = = 72 days 41 Continued next slide.

42 Part C TOC Applications Critical Chain Project Management Rules Critical Chain Project Network (continued) A-14 B- C D-20 C-16 E Add Project Buffer PB = 50% of unpadded d Critical Chain Path LT Lead Time (LT) = = 72 days 4. Remove padding/safety from individual task times (Usual TOC rule of thumb: cut all individual task times in half (i.e. by 50%) = 0.5( ) = 18 days 6. Insert Feeding Buffers FB = 50% of unpadded Feeding Path LT = 0.5(7+5) = 6 days A-7 B-5 FB-6 C-8 D-10 C-8 E-10 PB-18 LT = = 54 days 42

43 Part C TOC Applications Exam Pointers 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 from previous parts of questions. Avoid common errors by checking your arithmetic. Make any required calculations on blank scratch paper supplied by exam proctor and submit with your exam. Key Points Always show your calculations because if you fail to get the right answer, but show how you think, you may still get partial credit. Check your arithmetic as you go. 43

44 Part C TOC Applications Sample Questions Questions 1. A specialty shop sells its ice cream cones with your choice of any three toppings for $2.95. The cost of the ingredients of each variety of cone is $1.00, the labor to make the cone is $0.50 and the operating expenses per cone is $0.25. The throughput from the sale of one cone is: a. $2.45 b. $2.95 c. $1.95 d. $ Which of the following statements are true about a single project management critical chain? I. It considers and removes the effects of the Student Syndrome and Parkinson s Law in the time estimates. II. It uses a 90% probable task time estimate. III. It inserts a project buffer which consists of part of the safety removed from the individual tasks. a. I and II only. b. I and III only. c. II and III only. d. All are true 44

45 Suggestions for Writing a Good Exam Carefully read and understand the question Ask yourself what is given and what is requested If question seems unclear, record your assumptions If calculations are applicable, clearly present your work Pace yourself keep working, skip and come back Answer all questions no penalty for guessing 45

46 Your Questions? 46