What are the Theory of Constraints Applications for Operations Management and Supply Chain Replenishment?

CMS bases its methodologies on the Theory of Constraints (TOC) -  a business management philosophy created by Dr. Eli Goldratt in the early 1980s.  Central to TOC is that every system has a constraint that prevents the system from achieving higher levels of performance.  Once an organization knows where its constraint is, it can determine how best to leverage its performance.   TOC is used worldwide in manufacturing (high and low volume), construction, financial services, insurance and health care etc. to dramatically improve results.  TOC works hand in hand with Lean Thinking and Six Sigma. 

The TOC applications for Operations Management and Supply Chain Replenishment are:

Drum-Buffer-Rope Production Planning and Execution

Order Flow Issue Reporting Continuous Improvement

Consumption Driven Replenishment Inventory Management

Throughput Accounting based Decision Making Framework

Drum-Buffer-Rope Production Planning and Execution

Drum-Buffer-Rope (DBR) is a production scheduling and execution approach applicable to any operational flow with at least one work centre or department.  DBR is designed to increase quality output of the right product in the shortest possible time.  DBR has three components:

Drum - sets the pace for the operational flow and dictates the rate at which products can be processed. Since every system has a constraint (or control point) any actions taken to optimize the performance of the drum optimizes the performance of the operational flow.

Buffer - ensures that just enough of the right work is sitting in front of the drum so that the drum always works on the right thing and doesn’t run out of things to work on.  The buffer provides clear priorities to the Drum as well as to all other work centres or departments.

Rope – limits the release of new work in to the operational flow in line with the pace of the Drum.  As the Drum processes one unit of work (units or time) the Rope releases one more unit into the operational flow. 

Order Flow Issue Reporting Continuous Improvement

Many companies are taking steps to continuously improve their business by implementing common methodologies such as Lean Thinking or Six Sigma.  Both Lean and Six Sigma have excellent tools to help with the reduction of waste and variability.  The problem is that many companies spend too much time and resource improving with very little impact on the company’s income statement.  The reason must be the criteria that most companies use to determine or prioritize what to fix.  The current criteria usually focus improvement efforts on cost reduction or on activities with a high likelihood of success.  Order Flow Issue Reporting (FIR) allows companies to determine what needs fixing based on the most common issues that negatively impact flow.  Since flow is what ultimately determines customer service and output, order FIR is the only way to ensure that the issues that are fixed will directly impact business performance. 

Consumption Driven Replenishment

Consumption Driven Replenishment (CDR) is a solution for Manufacturing AND a solution for Distribution.  In manufacturing, CDR is focused on the synchronization of materials (raw materials, purchased parts, manufactured components, and finished goods).  In distribution, CDR is focused on the synchronization of products at the right place in the supply chain.  CDR links material and product availability directly to actual consumption by establishing strategically located inventory buffers that dynamically adjust (up or down) based on actual consumption. 

Throughput Accounting Decision Making Framework

Management Accounting is about making decisions not about financial reporting.  Businesses make four common decisions: 

• how well the business locations are performing
• which products make the most money
• whether a business should outsource
• whether or not they should invest in equipment

All of the above decisions are impacted by the measures used.  Throughput Accounting includes a set of measures that focus an organization on maximizing flow – increase quality output of the right product in the shortest possible time.  While managing and controlling costs is very important, not measuring and maximizing flow is the most costly thing of all.  The primary financial measures in Throughput Accounting are Throughput, Investment and Operating expense.  The primary operational measures are: schedule adherence and constraint activation.