ABB OPEX Advanced Skills Development Constraints Management © ABB Month DD, YYYY | Slide 1
Training Objectives § § Understand how best to exploit it § Be able to apply the 5 Focusing Steps of the Theory of Constraints (TOC) § © ABB | Slide 2 Understand the concept that a system constraint is the limiting factor in a value chain Learn how to apply TOC with Pull Systems
Contents § § Guitar Factory Game § The 5 Focusing Steps of the Theory of Constraints § Pull Systems § © ABB Group 18 March 2018 | Slide 3 What is the Theory of Constraints? Throughput Accounting
What is the Theory of Constraints? § Theory of Constraints (TOC) is a philosophy and concept developed by Dr. Eliyahu M. Goldratt that provides tools and roadmaps for radically improving the performance of organisations. § Popularized in his business novel The Goal § TOC states that: § § if this were not true, then the system would produce an infinite amount of whatever it is designed for, its goal § In the case of a profit-making organization, the goal is profits § © ABB Group 18 March 2018 | Slide 4 every real system such as a profit-making organization must have at least one constraint (bottleneck) The constraint alone determines the output of the organization
Constraints in our everyday lives Happens whenever demand exceeds capacity © ABB Group 18 March 2018 | Slide 5
Benefits of TOC § TOC is good for your Key Performance Indicators* § § TPT: 65% reduction § OTD: 44% improvement, often to 100% § Inventory: 49% reduction § § TTPT: 70% reduction Production capacity: 23% increase without investments ABB implementations § WIP: 50% reduction § TPTT and TPT: 50% reduction § Production capacity: 30% increase without investments * Mabin & Balderstone, The World of the Theory of Constraints © ABB Month DD, YYYY | Slide 6
ROI of 20 Large TOC Projects in ABB § These projects modify value streams more than improve individual process steps § Average project duration 16, 6 months § Average net present value 14, 3 MUSD § Average total cost including investment was 0, 57 MUSD § Average payback period was less than 3 months. © ABB Month DD, YYYY | Slide 7
Why Do We Need TOC? § Standard cost based metrics promotes undesirable behavior § Work to keep people busy § § § Local efficiency optimization Inventory is produced regardless of need Negative impacts of high WIP and inventory § § Quality problems difficult to trace and solve § © ABB Month DD, YYYY | Slide 8 Long throughput time (lead-time) and poor on-time-delivery (OTD) due to queuing effects § § Less free cash Factory floor chaos - difficult to expedite Financial accounting metrics and KPIs are not useful for shop-floor improvement tactics
Guitar Factory B AB © ABB Month DD, YYYY | Slide 10
What are the problems in your factory? § What problems do you have with: § In production? § In engineering? § With customers? § With deliveries? § With factory workers? § With marketing and sales? § With overhead expenses? § Take 5 minutes, discuss with your neighbor and write down some things from your own experience § Share with the rest of the group
Typical problems with production § Some actual problems from an ABB factory: § § Suppliers do not deliver material on time § Variability in cycle times § Productivity is low § Lack of critical workers § Engineering changes during production § Production does not stick to the schedule § § Customers change requirements after engineering start Products are finished late, poor on-time-delivery How do your problems compare?
Guitar Factory, the Perfect Factory § No problems … § § In engineering, the design never changes § With customers, they always order the same amount each week § With deliveries, all material is at the workstation when you want it § With factory workers, they are never sick, never complain § With marketing and sales, we have none! § § In production, everything is working, no down time With overhead expenses, low and fixed Everything is predictable!
Guitar Factory
Guitar Factory § BOM & Direction of Flow § How to start and pause § Production speed § Assigning resources to tasks § § Process times § § Set-up time 2 workers on 1 task Purchasing Materials § Material costs § Customer demand § Prices of products § Cash and operating expense § Starting WIP § See notes page for more detail
Guitar Factory Round #1 § Run the factory for a week § When you get to this screen, do not close it! Tell me how you did
Guitar Factory Round #1 Team Profit Inventory Standard Custom Tiger -6140 6120 50 (87) 28 Buffalo -2250 1200 0 75 (80) Elk 150 3100 50 (60) 45 Dragon 2740 1560 50 52 …
Constraints Demo TOC Flash Demo courtesy of: Ensemble Partners Pty Ltd
Foundation of Theory of Constraints § The maximum throughput of a system is the throughput of the slowest operation, called the constraint or bottleneck § Any effort to increase throughput of a system will be wasted unless the constraint is opened up What is the maximum system throughput / day? 20 / day 16 / day Courtesy of: Ensemble Partners Pty Ltd 10 / day 14 / day 18 / day
The Five Focusing Steps of TOC 1. Identify the system constraint 2. Decide how to exploit the constraint 3. Subordinate all other activities to the constraint 4. Elevate the constraint 5. Go back to step one, the constraint may have moved Warning, DO NOT let inertia (laziness and complacency) become the new constraint
1. Identify – Where is the constraint?
What is a constraint? § A constraint is the part of the value stream that has a capacity that is less than the demand upon it Courtesy of: Ensemble Partners Pty Ltd © ABB Month DD, YYYY | Slide 22
The 5 Focusing Steps of TOC Reasons for constraints § Internal § Process constraints § External § Material constraints § § Not enough raw materials § Quality § Poor material quality § Manpower § § Machine down time Procedure § Missing information Policy constraints § Not enough demand § § Empowerment causing multitasking § © ABB Group 18 March 2018 | Slide 23 Local optimization No overtime § Market constraints
1. Identify the constraint § By examination § § See where WIP is accumulating § § Go to the factory and observe the workflow The most WIP will accumulate in front of the constraint By calculation § Document the current Value Stream Map of the system § Calculate throughput period for each operation § Calculate the market demand for the final product § Any operation with a throughput less than the market demand is a constraint § The operation with the lowest throughput should be targeted first
1. Identify the constraint? See notes for additional information
2. Exploit – How we should do it?
2. Exploit the constraint § Make it work at 100% § § Do not process defective parts on the constraint § Offload work that can be done by non-constraint work centers § § Ensure the constraint’s time is not wasted Make to order first (get the cash fast) before make to stock Maximize the generating of profit or “Goal units” § What is the optimal product mix in terms of profit?
2. Exploit – Optimal Product Mix Standard Custom § Selling Price € 400 € 550 § Raw Material € 130 € 180 § Margin (throughput) € 270 € 370 § Time on constraint (Electrician) 10 min § Throughput/min at constraint § TOC does not use product component costing to determine product profitability 25 min 27, 00 €/min 14, 80 €/min Go to Throughput Accounting to learn more
3. Subordinate - Schedule § Plan upstream production to keep the constraint working at 100% § § § Provide an input stock feeding buffer to protect the constraint from upstream stoppages Do not produce more upstream than the constraint needs + a buffer of input stock to protect against upstream stoppages Work processed by the constraint does not wait to be completed to generate throughput (Goal units or Money) § § § A space buffer is placed after the constraint to allow it to produce (prevent blockage) Assembly / integration buffers Make upstream batch sizes optimal for the constraint § Not optimal for the upstream processes § Not to maximize efficiency at upstream processes § Orders are split up to have even load on the constraint
3. Subordinate § The constraint only processes non-defective inputs § The constraint processes work that will generate throughput in the short term § Produce FG only after customer orders § Reduce total setup time at the constraint and non-constraints that are close to becoming a constraint § Ensure that it does not process work that could be completed by another resource § Sales are accepted according to constraint availability § § Capacity Checking Use throughput accounting to maximize the profit from the available orders in the market
3. Subordinate – How we should do it? See notes for additional information
4. Elevate the Constraint § Spend more money to increase the capacity of the constraint § § Work more shifts or overtime * § Hire more people § Buy more new or used equipment § Subcontract § Modify the design to need less of the constraint can be done by component suppliers * § § Increase equipment efficiency with investments Offload to modified non-constraint processes Calculate ROI using Throughput Accounting principles * See notes for examples
5. Go Back to Step 1 After going through the first four steps, the constraint may have moved, so go back and identify the constraint…
Guitar Factory Round #2 § Taking the constraint and market into consideration, what is the optimal product mix? § Create a production schedule and run it § Record how you did for Round #2
Guitar Factory Round #2 Team Profit Inventory Standard Custom Tiger 6810 2060 50 63 Buffalo 4590 2640 50 57 Elk 7920 720 50 66 Dragon 8660 540 50 68 …
Pull Scheduling Systems § Drum-Buffer-Rope § Con. WIP © ABB Month DD, YYYY | Slide 36 (DBR) and Scheduling
DBR Production Scheduling § How to schedule production to maximize profit through effective constraint utilization § § § Protect the constraint by providing it with a reserve of work large enough to keep the constraint working even if there is a problem upstream But not too much to extend throughput time Drum – Buffer – Rope § Drum is the constraint. The tempo is the constraint production rate § The Buffer is actually the time buffer needed between job release and the Drum to prevent the drum from starving. This results in a reserve of work in front of Drum § The Rope is the time calculated from the drum to the release of work. The Rope is the scheduled “start no earlier than” date
Signal the release of more work § Create a signal (Rope) from the constraint (Drum) to the start of production to release new work § When one unit is finished, one unit is released § WIP never grows larger than the buffers All WIP before the Drum is the Buffer All WIP in and after the Drum is the Shipping Buffer Courtesy of: Ensemble Partners Pty Ltd
DBR Production Scheduling Schedule Rope = Material release signal Job pool Job exit Drum Work Buffer Shipping Buffer (Time) Customer demand (Time) Drum = The Capacity Constrained Resource that is scheduled Rope = Material is released only ‘a time buffer’ before it is needed on the Drum. Keeps WIP and cycle time in control. Buffers = ‘Shock absorbers’ against variability and Murphy. Dimensioned just to protect the Drum from starvation and protecting delivery due dates. Time buffers outperform inventory buffers because they improve protection and reduces lead time by aggregating the safety and also adapt to changes in consumption.
DBR in Waterford three-phase distribution transformer line Info of # of units tanked daily # of Scheduling Targets/shift displayed. Takt time! Even output jobs to s Core tart Frozen order sequence Decide WIP level & Release of next jobs § Materials ok; (Available & quality ok) § Order sequence frozen Insulation Assly Oven Tanking Buffer before oven Oven = Constraint BOM ok § Winding Tank mfg Constant Work In Progress CP Testing & Finish Dispatch
Buffer Management Job pool Drum Job exit Customer Demand = jobs with color according to buffer condition = Not expected or needed at the Drum or exit = Should be near the Drum. Watch & Plan = Should be at the Drum. If not, then expedite n Buffer Management is an monitoring system for n early warnings, n priorities and n information for continuous improvement
Return on Capital Employed (ROCE) Is WIP and Asset or Liability? This is the level of WIP that allows us to protect the Drum and have low TPT Asset WIP Level When WIP is too high, TPT increases. Liability When WIP drops too low we have to wait between jobs. The Drum is wasted and we lose throughput. It takes longer to get the cash from the customer for each order.
Vaasa, Special Transformers - Production Control Assembly queue Amount of Kanban cards . . 102 101 100 CONWIP G 0 Offer G 1 El. design G 2 Mec. Design G 3 Material Core Assy G 4 Winding Assy Tank 38 Model Transformers Freezing Point Buffer of finished designs: Wind on leg = 20 Wind on mandrel = 40 FROZEN PERIOD = Buffer = Logical gate See notes for explanation Assy Down stream G 5 Assy CONWIP
Today Planning and Follow-up of Drum See notes for explanation
Traffic lights at gates 3 and 4, give a visual view of the production situation.
Meeting point in the Factory
Rules of the game § It is not allowed to schedule 2 or more transformers that need high labor hours in a row (for example only every fourth transformer can be complicated) § There is a change freezing period between design & start of production § Cover needs to be ready before tank § Takt time 2 + 2 trafos/day § Every transformer has an queue number (1, 2, 3, 4, …. ), which shows in which order to assemble § Traffic lights are used to monitor buffer size § Only projects that have a Kanban card are allowed to start § § Except in Assembly, where transformers are assembled in the queue number order If work does not have Kanban card, work cannot start
Kanban card and kits
Simple Pull Execution: Con. WIP (Constant WIP) § Constant Work In Progress § Rope (Kanban) is around a larger part of the workflow § Production is not tightly coupled to customer demand § § Build to stock Allow limited WIP to accumulate in front of the constraint K Courtesy of: Ensemble Partners Pty Ltd
Con. WIP in SECOM – GOB Bushings Job queue § 100 cards §(4 d TPT x 25 units/d) Winding Assembly Vacuum & Oil filling . . 102 101 100 Test room Packing Results: èTPT and TTPT reduction by 50 % èWIP reduction by 50 % while having an output increase by 30 %
TOC Summary Simple Strategy § TOC in a word is about FOCUS. The few things you need to focus your attention on to quickly improve performance. § There is no limit to the Throughput you can bring into your factory. Always create strategies that maximize Throughput. § Operating Expense and Investment are relatively fixed for all organizations, so there is a limit to how much cash you free up through savings. § Throughput is limited by the constraint § Apply the 5 Focusing Steps to increase Throughput § Focus Lean tool application on the constraint first for fast ROI! © ABB Group 18 March 2018 | Slide 52
Reference § Content created and / or edited by: Alex D’Anci § Reference literature § Goldratt; The Goal § Goldratt; The Race § Theory of Constraints Handbook; Cox & Schleier editors § Reference Links inside. abb § Reference Links internet: § § http: //en. wikipedia. org/wiki/Theory_of_Constraints § © ABB Month DD, YYYY | Slide 54 http: //www. dbrmfg. co. nz/ http: //www. tocca. com. au/ http: //www. ensemblepartners. com. au/
Reference Flash TOC Demo courtesy of: Ensemble Partners Pty Ltd Level 15, Tower 2 Westfield Towers 101 Grafton Street Bondi Junction NSW Australia 2022 http: //www. ensemblepartners. com. au/ Telephone: +61 2 9387 3955 Fax: +61 2 9387 4637 © ABB Month DD, YYYY | Slide 55
Excel Solver § Solver in Excel can be used to find solutions for Guitar Factory and calculate the ROI of improvement projects. NOTE: Solver plug in needs to be enabled in Excel for this to work © ABB Month DD, YYYY | Slide 56
§ Throughput Accounting
Cost Accounting § Cost Accounting is a management accounting tool to help make tactical decisions about investments, product pricing and production mix. § Cost Accounting assumes that all costs associated with producing a unit of product or service are totally variable down to the individual unit level. § § This is why local efficiency and productivity are important Cost Accounting assumes that all the company’s resources are equally important, and for that reason, can be divided equally over all products and services produced. § This is where allocation comes from
Throughput Accounting § Throughput Accounting is a management accounting tool to help make tactical decisions about constraints. § Remember the 5 Focusing Steps? § Throughput Accounting assumes that only some costs are totally variable, and the rest are not variable § Applications include: § Constraint identification § Determine the optimal product mix for maximum profit § Make – Buy decisions § Easy and realistic ROI calculations for improvement projects
Definitions – T, I and OE § Throughput – T – is the rate at which the company generates money through sales. It is the price minus the truly variable costs. § § § If it has not been sold to somebody outside the company, it does not count as throughput. Always try to maximize Throughput Investment – I – is all the money the company invests in things it needs to create throughput. § § Includes machines, buildings, development costs and other assets § WIP held for more than one accounting cycle § § Cash tied up in assets Always try to minimize Investment Operating Expense – OE – is all the money the company spends turning raw material into throughput. § Includes fixed costs, direct labor, sales & marketing, administration, cost of capital, utilities and other overheads § Always try to minimize Operating Expense
The Factory § Throughput Accounting uses a global model for a factory RM T+RM Money to Suppliers Money from Customers Operating Expense Money to cover non-variable costs and labor Net income = T – OE Net income and OE only have meaning at the global level
Simple Strategy § There is no limit to the Throughput you can bring into your factory. Always create strategies that maximize Throughput. § Operating Expense and Investment are fixed for all organizations, so there is a limit to how much cash you can get through savings. § Throughput is limited by the constraint § Concentrate on the 5 Focusing Steps to increase Throughput!
Example § Pizza Shop § Sells 2800 pizzas per month § Pizza is sold for € 5 each ( T + RM = € 5 ) § Raw material for each pizza RM = € 1 § Throughput per pizza T = € 4 § Loaded salaries for 2 employees = € 8000 per month § Rent on shop = € 1000 per month § Advertising = € 500 per month § Electricity, water, telephone, waste = € 500 per month § Loans, insurance, security and other fixed cost = € 1000 per month § OE = € 8000 + € 1000 + € 500 + € 1000 = € 11. 000 per month § T = € 4 x 2800 = € 11. 200 per month § Net income = € 200 per month
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