09 The_Philosophy_of_Opt (1)

09 The_Philosophy_of_Opt (1) - The Philosophy of TOC Theory...

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The Philosophy of TOC The Philosophy of TOC
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Theory of Constraints Theory of Constraints TOC (Theory of Constraints) : It focuses on constraints, as opposed to Lean Manufacturing, which attempts to eliminate waste at all operations. Goal : To make more profit. In pursuing this goal, three key financial performance measures - throughput, inventory, and operating expense – determine the level of these financial measures.
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Financial Measures Financial Measures Throughput is the rate at which the manufacturing firm sells finished goods. Note that throughput under TOC is not synonymous with production rate . Inventory is defined by OPT to be “the money the firm has invested in purchasing things which it intends to sell.” These include raw materials, components, and finished goods that have been bought by the firm but not yet sold. In a departure from standard accounting practice, labor and overhead are not included in the inventory. Operating Expense is the cost of converting inventory into throughput. It includes direct and indirect labor, electricity, etc.
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Constraints Constraints Internal Resources : A bottleneck machine Market Related : Demand level Policy Related : A policy that allows no work on weekends.
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A Procedure for Dealing A Procedure for Dealing with Constraints with Constraints 1. Identify the primary constraint. 2. Find out how to exploit the constraint. 3. Subordinate everything else to the decision made in step 2. 4. Elevate the constraint so that higher level of performance can be achieved. 5. If the constraint is eliminated, go back to step 1.
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Example Example Products A B Price ($/unit) $80 $100 Cost of Materials ($/unit) $20 $25 Market demand per week (units) 200 110 Unit labor cost L L Unit overhead cost O O Time on the bottleneck machine (hours/unit) 0.2 0.5 Contribution margin ($/unit) $60 $75 Two products : A and B Contribution margin = Price – cost of material – direct labor
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Example Example In the above table, both products are assumed to
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