BADM 375 Lecture Notes - Lecture 4: Cash Flow, Net Profit
10 Jul 2019
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Theory of Constraints
10/11/2016
• Limitations of our concepts→
o Throughput: doesn’t address quality, focuses on time. Mostly seen at the
process level instead of covering the whole organization.
o Productivity: doesn’t tell us how long a process take
o Balancing capacity: capacity is not dictated by flow time
o Cycle time: low cycle time doesn’t mean low flow time
• Goldratt’s Theory of Constraints:
o Instead of looking to balance capacity, we should balance flow time
o Bottlenecks govern both throughput and inventory in the system
o Identify system constraints→decide how to exploit constraints, subordinate
everything→elevate constraints→if constraints have been broken, go to step 1 but
don’t let inertia become the system constraint.
▪ Constraint is basically a bottleneck
• The goal of a firm is to make money
• Performance measures—Financial
o Net profit: absolute measure in dollars
o Return on investment
o Cash flow
• Performance measures—Operational
o Throughput: always connected to sales in this case
o Inventory:
o Operating expenses: all money system spends to turn inventory into throughput
o GOAL: Want to increase throughput while reducing inventory and operating expenses
• Unbalanced capacity:
• Bottlenecks and capacity—constrained resources
o Capacity-constrained resource (CCR): resource where capacity is close to demand on the
resource
o An hour saved or lost at a bottleneck is an hour saved/lost for the whole system
▪ At a non-bottleneck, a lost/saved does nothing
• Time components
o Setup time: time needed to get a resource ready to work (can be a bottleneck)
o process time: time part is being processed (worked on) (doesn’t include waiting time)
o queue time: time part waits for resource while resource is bust with something else
o wait time: time part waits for another part so it can be assembled
o idle time: unused time
• Drum, buffer, rope
o
• Batch sizes:
o Larger batch size require fewer setups and therefore more time for processing
o Nonbottleneck resources→smaller batch sizes and better (reduces WIP inventory)
o Process and transfer batch sizes shouldn’t be equal
• Dollar Day measurement: value of inventory at a time and stays within area
o Inventory value * number of days inventory spends within the area code
