constraint management overview chris zephro director, finance - seagate technology toc-ico certified...

72
Constraint Management Overview Chris Zephro Director, Finance - Seagate Technology TOC-ICO Certified Practitioner Six Sigma Principal Master Black Belt Lean Master

Post on 19-Dec-2015

218 views

Category:

Documents


0 download

TRANSCRIPT

Page 1: Constraint Management Overview Chris Zephro Director, Finance - Seagate Technology TOC-ICO Certified Practitioner Six Sigma Principal Master Black Belt

Constraint Management Overview

Chris ZephroDirector, Finance - Seagate TechnologyTOC-ICO Certified PractitionerSix Sigma Principal Master Black BeltLean Master

Page 2: Constraint Management Overview Chris Zephro Director, Finance - Seagate Technology TOC-ICO Certified Practitioner Six Sigma Principal Master Black Belt

System Complexity

System 1 System 2

Which system is more complex?

Page 3: Constraint Management Overview Chris Zephro Director, Finance - Seagate Technology TOC-ICO Certified Practitioner Six Sigma Principal Master Black Belt

What is the Systems Approach?

• Originally proposed by Dr. W. Edwards Deming

• Holistic thinking

• The whole is not the sum of its parts.• Interaction-interdependencies-among components are as important, or

more important, than the performance of the components themselves• The whole system can’t be managed effectively by suboptimizing.

• Avoid Suboptimization.• Not all components are created equal.• Some may accept inefficiencies so that more critical components can

succeed.

Page 4: Constraint Management Overview Chris Zephro Director, Finance - Seagate Technology TOC-ICO Certified Practitioner Six Sigma Principal Master Black Belt

The “Archimedes Point”

“Give me a lever long enough and a place to stand, and I can move the world.”

Page 5: Constraint Management Overview Chris Zephro Director, Finance - Seagate Technology TOC-ICO Certified Practitioner Six Sigma Principal Master Black Belt

Constraint Management

Page 6: Constraint Management Overview Chris Zephro Director, Finance - Seagate Technology TOC-ICO Certified Practitioner Six Sigma Principal Master Black Belt

What is Constraint Management?

• Constraint Management is a system-level management philosophy developed by Dr. Eliyahu Goldratt that can be viewed as three separate but interrelated areas:

1. Performance Measurements: Throughput Decision Support and the Five Focusing Steps

2. Logistics: Drum-Buffer-Rope Production Scheduling and Buffer Management.

3. Logical Thinking: Logical Thinking Process (Current Reality Tree, Future Reality Tree, Conflict Resolution Diagram, Prerequisite Tree and Transition Tree)

4. Project Management: Critical Chain Project Management

Page 7: Constraint Management Overview Chris Zephro Director, Finance - Seagate Technology TOC-ICO Certified Practitioner Six Sigma Principal Master Black Belt

Assumptions Underlying Constraint Management

• Every system has a goal and a set of necessary conditions that must be satisfied in order to maximize achievement of the goal.

• All systems are subject to logical cause-and-effect.

• Organizations live or die as integrated systems, NOT as a collection of discrete, independent processes.

• Systems are analogous to chains.• The performance of a system is limited by very few links at any given time, usually

only one.

• The global organization is greater than the sum of its parts.• The way to improve company performance (global optimum) is NOT through

achieving local improvements (local optimum) everywhere.

• Constraints can never really be eliminated – they just move to a different place.

Page 8: Constraint Management Overview Chris Zephro Director, Finance - Seagate Technology TOC-ICO Certified Practitioner Six Sigma Principal Master Black Belt

How do you strengthen a chain?

Page 9: Constraint Management Overview Chris Zephro Director, Finance - Seagate Technology TOC-ICO Certified Practitioner Six Sigma Principal Master Black Belt

The Manufacturing Chain

Which is likely to be the weakest link (system limitation)?

#1(2)

57%

#2(1)

19%

#3(1)

71%

#4(1)

32%

#5(1)

36%

#6(1)

41%

#7(2)

42%

MachineCapacityUtilization

(Monthly)

Page 10: Constraint Management Overview Chris Zephro Director, Finance - Seagate Technology TOC-ICO Certified Practitioner Six Sigma Principal Master Black Belt

Marketing & Sales

Supplier #2

Supplier #1

Production

ExternalService

Distribution#1 #2 #3 #4 #5 #6 #7

The chain really extends from the market demand, through the entire organization chain, to the external customer who pays for our products

CUSTOMER

The Manufacturing Chain(Expanded)

Page 11: Constraint Management Overview Chris Zephro Director, Finance - Seagate Technology TOC-ICO Certified Practitioner Six Sigma Principal Master Black Belt

Constraint Management

Fundamentals

The Five Focusing Steps

Page 12: Constraint Management Overview Chris Zephro Director, Finance - Seagate Technology TOC-ICO Certified Practitioner Six Sigma Principal Master Black Belt

The Five Focusing Steps of Constraint Management

1. Identify the System’s Constraints.

2. Decide how to Exploit the System’s Constraints.

3. Subordinate everything else to the above decision.

4. Elevate the System’s Constraints.

5. If in the previous steps a Constraint has been broken, go back to Step 1.

Page 13: Constraint Management Overview Chris Zephro Director, Finance - Seagate Technology TOC-ICO Certified Practitioner Six Sigma Principal Master Black Belt

Step 1 - Identify the System’s Constraints

• What limits the system performance now?• Is it inside the system (a resource or policy) or is it outside

the system (the market, material supply, a vendor . . . or another policy)?

• When looking at a process, where is the one point people always have to go to expedite?

Page 14: Constraint Management Overview Chris Zephro Director, Finance - Seagate Technology TOC-ICO Certified Practitioner Six Sigma Principal Master Black Belt

What is a Constraint?

Anything that limits a system in reaching its goal.

Types of Constraints:1. Market – Not enough demand for a product or service.2. Resource – Not enough people, equipment, or facilities.3. Material – Inability to obtain required material.4. Supplier/Vendor – Unreliability of a supplier or vendor, or excessive

lead time in responding to orders.5. Financial – Insufficient cash flow to sustain an operation.6. Knowledge/Competence – Information or knowledge to improve

business performance is not resident within the system or organization.

7. Policy – Any law, regulation, rule, or business practice that inhibits progress toward the system’s goal.

Page 15: Constraint Management Overview Chris Zephro Director, Finance - Seagate Technology TOC-ICO Certified Practitioner Six Sigma Principal Master Black Belt

Examples of Policy Constraints• “We will not approve new projects if the projected IRR is less than 20%

in three years.”• Reason given for not pursuing new technology development.

• “If we can’t manufacture a component for less than we can buy it, we will outsource that component.”

• International Harvester policy in the 3 years before bankruptcy.

• “We are a metal-stamping company.”• Reason given for not investing in laser-cutting technology.

• “We can not add components that will increase BOM cost or negatively impact gross margins.”

• Policy that makes decisions blind to impact at the system constraint.

And the most common one of all . . .

• “We strive for efficiency everywhere.”

Page 16: Constraint Management Overview Chris Zephro Director, Finance - Seagate Technology TOC-ICO Certified Practitioner Six Sigma Principal Master Black Belt

Other Constraints

• Material• Unavailable• Slow

• Vendor / Supplier• Unreliable• Slow

• Financial• Cash Flow

• Knowledge / Competence• Lack of expertise, knowledge• Lack of competent skills

Page 17: Constraint Management Overview Chris Zephro Director, Finance - Seagate Technology TOC-ICO Certified Practitioner Six Sigma Principal Master Black Belt

Step 2 - Decide how to Exploit the System’s Constraints

Exploit means to get the most out of the constraining element without additional investment.

• Change the way you operate so that the maximum financial benefit is achieved from the constraining element.

• Understand the sales mix that maximizes the Capacity Constrained Resource (CCR) or identified Capacity Point.• Throughput Decision Support using Throughput per CCR Hour.

Exploit: Use; develop; make use of; take advantage of; make the most of.

Page 18: Constraint Management Overview Chris Zephro Director, Finance - Seagate Technology TOC-ICO Certified Practitioner Six Sigma Principal Master Black Belt

Step 3 - Subordinate everything else to the above decision

• All parts of the system that are NOT constraints are required to do whatever they can to SUPPORT the plan to EXPLOIT decided on in step 2.

• All non-constraints must NOT DO ANYTHING that would HURT the exploitation plan for the constraint.

• Non-constraints (most of the system) recognize that THEIR OWN EFFICIENCY is not as important as supporting the system constraint.

Page 19: Constraint Management Overview Chris Zephro Director, Finance - Seagate Technology TOC-ICO Certified Practitioner Six Sigma Principal Master Black Belt

Step 4 - Elevate the System’s Constraints

• Evaluate alternative ways to ELEVATE one or more constraints.

• Predict where the future constraint will be (after elevation) and its impact on the global performance.

• Mentally apply the first three steps to each alternative• Where will the constraint go NEXT, and how difficult will it be to manage

it THERE?

• Select the best alternative to elevate the constraint.

Elevate: To physically raise or increase the capacity to flow work through a resource or system component; acquisition of, or investment in, more resources.

Page 20: Constraint Management Overview Chris Zephro Director, Finance - Seagate Technology TOC-ICO Certified Practitioner Six Sigma Principal Master Black Belt

The Five Focusing StepsStrategic & Tactical Implications

ELEVATE

SUBORDINATE

IDENTIFY

EXPLOIT

TA

CT

ICA

L D

EC

ISIO

NS

ST

RA

TE

GIC

D

EC

ISIO

NS

TR

AT

EG

IC

DE

CIS

ION

Page 21: Constraint Management Overview Chris Zephro Director, Finance - Seagate Technology TOC-ICO Certified Practitioner Six Sigma Principal Master Black Belt

Step 5 - The Five Focusing Steps

• Go back to step one. Beware of inertia in identifying constraints.

• The actual new constraint may be different from what was expected.

Page 22: Constraint Management Overview Chris Zephro Director, Finance - Seagate Technology TOC-ICO Certified Practitioner Six Sigma Principal Master Black Belt

Red Curve & Green Curve

• Repeated application of the Five Focusing Steps

• Successive constraints broken

• Cost reductions (efficiency target)

• Single iteration of the Five Focusing Steps (inertia)

Time

$$$

Improvement

Page 23: Constraint Management Overview Chris Zephro Director, Finance - Seagate Technology TOC-ICO Certified Practitioner Six Sigma Principal Master Black Belt

Constraint Management

Evaluating Operating Decisions

Page 24: Constraint Management Overview Chris Zephro Director, Finance - Seagate Technology TOC-ICO Certified Practitioner Six Sigma Principal Master Black Belt

Evaluating Operating DecisionsThe Traditional Approach

• The financial standard for most decisions is profit• A decision that produces higher profit is GOOD.• A decision that produces lower profit is BAD.

• Three key financial measures to evaluate the correctness of a decision . . . .

• Net Profit (NP)• Cash Flow (CF)• Return on Investment (ROI)

Page 25: Constraint Management Overview Chris Zephro Director, Finance - Seagate Technology TOC-ICO Certified Practitioner Six Sigma Principal Master Black Belt

Evaluating Operating DecisionsThe Traditional Approach

• NP and ROI are very difficult concepts to apply to day-to-day decisions.

• Effects of a decision on NP and ROI not easily quantifiable in financial terms.

• How to determine the global (company-wide) financial impact of local (departmental) decisions?

• Constraint theory provides a bridge between local operating decisions and global financial well-being . . .

Page 26: Constraint Management Overview Chris Zephro Director, Finance - Seagate Technology TOC-ICO Certified Practitioner Six Sigma Principal Master Black Belt

Evaluating Operating DecisionsThe Constraint Management Approach

• Throughput (T)

• Investment (I)

• Operating Expense (OE)

These measures are predicated on the assumption that the organization's goal is to make more money, now and in the

future.

Page 27: Constraint Management Overview Chris Zephro Director, Finance - Seagate Technology TOC-ICO Certified Practitioner Six Sigma Principal Master Black Belt

Throughput (T)

• The rate at which the organization generates “goal units.”

• In a for profit organization, “goal units” equals money (i.e. incremental cash flows) through sales. New money coming into (and retained by) the system.– Sales minus Truly Variable Costs (TVC), where TVC is the costs

that vary directly with the number of units sold, usually just materials.

• Measured and assessed at the unit, product and organizational level.

Page 28: Constraint Management Overview Chris Zephro Director, Finance - Seagate Technology TOC-ICO Certified Practitioner Six Sigma Principal Master Black Belt

Throughput Hierarchy

• Company Level• Marginal contribution to profit of ALL sales in ALL product lines.

• Sales revenue – Variable Cost of all Sales

• Product Level• Marginal contribution to profit of ALL sales in ONE product lines.

• Sales revenue – Variable Cost of all Sales

• Unit Level• Marginal contribution to profit of ONE UNIT of product.

• Unit Selling price – Unit Variable Cost

Page 29: Constraint Management Overview Chris Zephro Director, Finance - Seagate Technology TOC-ICO Certified Practitioner Six Sigma Principal Master Black Belt

Investment (I)

• All the money the system invests in assets and materials that are used to produce the products or services the system intends to sell.

• Capital Assets• Facilities• Equipment

• Stock of finished goods• Receivables

Page 30: Constraint Management Overview Chris Zephro Director, Finance - Seagate Technology TOC-ICO Certified Practitioner Six Sigma Principal Master Black Belt

Operating Expense (OE)

• All the money the organization spends in generating “goal units / Throughput.” The money flowing out of the system.

• Normally, most categories of overhead (fixed expenses)• The money the organization constantly pays, even if production were to

stop for a while.• Salaries• Rent• Insurance• Depreciation

Page 31: Constraint Management Overview Chris Zephro Director, Finance - Seagate Technology TOC-ICO Certified Practitioner Six Sigma Principal Master Black Belt

T, I & OE Flow

$$$

Investment

Money Tied Up Inside the System

(System)

$$$

Throughput

Money Coming In

$$$

Operating Expense

Money Going Out

Page 32: Constraint Management Overview Chris Zephro Director, Finance - Seagate Technology TOC-ICO Certified Practitioner Six Sigma Principal Master Black Belt

Relation of T, I and OE to Traditional Business Measures of Merit

• Net Profit = T-OE• Return on Investment = (ΔT-ΔOE)/ΔI• Productivity = T/OE• Investment Turns = T/I

The profit from any decision is ΔT NOT ΔOE

• The system constraint limits the level of Throughput that can be achieved.

• Operating Expense is generated primarily by non-constraints.

Page 33: Constraint Management Overview Chris Zephro Director, Finance - Seagate Technology TOC-ICO Certified Practitioner Six Sigma Principal Master Black Belt

Using T, I, & OE for Decision Making

Page 34: Constraint Management Overview Chris Zephro Director, Finance - Seagate Technology TOC-ICO Certified Practitioner Six Sigma Principal Master Black Belt

Thinking Bridge Example

Demand = 3,500 DrivesPrice = $400 eachRaw Material = $80/DriveEmployee Wage = $18/hrNumber of Employees = 4 (1/workstation)Each Employee Works 2,080 hrs/year (40 hrs/week, 52 weeks/year)Other Expenses = $900,000

Drive Manufacturing Process:Workstation Processing Time

101 15 minutes

102 25 minutes

103 10 minutes

104 5 minutes

Total Time 55 minutes

Page 35: Constraint Management Overview Chris Zephro Director, Finance - Seagate Technology TOC-ICO Certified Practitioner Six Sigma Principal Master Black Belt

Labor & Overhead Allocation

Cost Elements

Calculation Rate per Direct Labor Minute

Direct Labor $18/hr / 60 minutes / hour =

$ 0.30

Overhead (4 direct labor employees) * (2,080 hrs/yr)

= 8,320 direct labor hours per year

(8,320 direct labor hours per year) * (60 min/hr) =

= 499,200 direct labor minutes per year

$900,000 / (499,200 direct labor minutes)

$ 1.8029

Combined $ 2.1029

Page 36: Constraint Management Overview Chris Zephro Director, Finance - Seagate Technology TOC-ICO Certified Practitioner Six Sigma Principal Master Black Belt

Standard Cost of One Drive

Cost Element Cost

Raw Materials $ 80.00

Direct Labor (55 minutes @ $ 0.30) $ 16.50

Overhead (55 minutes @ $ 1.8029) $ 99.16

Standard Unit Cost $ 195.66

Page 37: Constraint Management Overview Chris Zephro Director, Finance - Seagate Technology TOC-ICO Certified Practitioner Six Sigma Principal Master Black Belt

Scenario 1

• An Engineer proposes buying a new fixture to reduce total processing time by 3 minutes.

• The new fixture would allow some work to be transferred from workstation 101 to 102.

Proposed Change:

Workstation Original Processing Time

Proposed Processing Time

101 15 minutes 10 minutes

102 25 minutes 27 minutes

103 10 minutes 10 minutes

104 5 minutes 5 minutes

Total Time 55 minutes 52 minutes

Page 38: Constraint Management Overview Chris Zephro Director, Finance - Seagate Technology TOC-ICO Certified Practitioner Six Sigma Principal Master Black Belt

Scenario 1 – New Drive Cost

Cost Element Cost

Raw Materials $ 80.00

Direct Labor (52 minutes @ $ 0.30) $ 15.60

Overhead (52 minutes @ $ 1.8029) $ 93.75

Standard Unit Cost $ 189.35

Page 39: Constraint Management Overview Chris Zephro Director, Finance - Seagate Technology TOC-ICO Certified Practitioner Six Sigma Principal Master Black Belt

Scenario 1 – Cost Savings per Drive

Original standard unit cost $195.66

New standard unit cost $189.35

Cost savings per unit $ 6.31

Cost savings per unit $ 6.31

Annual volume X 3,500 units

Total annual cost saving $ 22,085

Less: Cost of fixture 5,000

First year cost savings $ 17,085

IRR = 400%, Payback Period < 3 Months

Is this proposal an improvement?

Page 40: Constraint Management Overview Chris Zephro Director, Finance - Seagate Technology TOC-ICO Certified Practitioner Six Sigma Principal Master Black Belt

Scenario 1 – Global Measurements Thinking Bridge Analysis

• When using the global measurements (T, I, & OE) technique for the financial analysis of a proposed expenditure, we need to ask 5 questions:

1. What prevents the firm from increasing throughput?2. Will the total amount of throughput change?3. Will the operating expenses of the firm change?4. Will the amount of investment of the firm change?5. What is the real economic effect of the proposal?

Page 41: Constraint Management Overview Chris Zephro Director, Finance - Seagate Technology TOC-ICO Certified Practitioner Six Sigma Principal Master Black Belt

Scenario 1 – The Five Questions

1. What prevents the firm from increasing Throughput?• Note: This question does not arise in least product cost thinking

bridge.• Strategic Control Point is 102, however the company could produce

4,622 drives/yr. (124,800 min. / 27 min. of 102) & demand is 3,500 drives.

2. Will the total amount of Throughput change?• No, the engineer’s proposal has no effect on volume of sales, neither

sales revenue or variable cost (raw materials).

3. Will the Operating Expenses of the firm change?• Do we have the same number of employees?• Has our overhead changed?• No, these all remain the same

Page 42: Constraint Management Overview Chris Zephro Director, Finance - Seagate Technology TOC-ICO Certified Practitioner Six Sigma Principal Master Black Belt

Scenario 1 – The Five Questions

5. Will the amount of Investment of the firm change?• Investment increases by $5,000

6. What is the real economic effect of the proposal?

Global Measurements

First Year Subsequent Years

T no change no change

I + $5,000 no change

OE no change no change

Cash Flow - $5,000 no change

Page 43: Constraint Management Overview Chris Zephro Director, Finance - Seagate Technology TOC-ICO Certified Practitioner Six Sigma Principal Master Black Belt

Scenario 2

• Everything is the same as in scenario 1, except the firm is currently producing and selling at its capacity of 4,992 units.

• The engineer makes the same proposal.

Page 44: Constraint Management Overview Chris Zephro Director, Finance - Seagate Technology TOC-ICO Certified Practitioner Six Sigma Principal Master Black Belt

Scenario 2 – Cost Savings per Unit

Original standard unit cost $195.66

New standard unit cost $189.35

Cost savings per unit $ 6.31

Cost savings per unit $ 6.31

Annual volume X 4,992 units

Total annual cost saving $ 31,500

Less: Cost of fixture 5,000

First year cost savings $ 26,500

IRR = 630%, Payback Period about 2 Months

Is this proposal an improvement?

Page 45: Constraint Management Overview Chris Zephro Director, Finance - Seagate Technology TOC-ICO Certified Practitioner Six Sigma Principal Master Black Belt

Scenario 2 – The Five Questions

1. What prevents the firm from increasing throughput?• Strategic Control Point (Capacity Constrained Resource) is 102.• The proposal increases the time required at workstation 102 from

25 minutes to 27 minutes.• The company can only produce 4,622 drives/yr. (124,800 mins. /

27 min of 102) & demand is 4,992 drives.

Page 46: Constraint Management Overview Chris Zephro Director, Finance - Seagate Technology TOC-ICO Certified Practitioner Six Sigma Principal Master Black Belt

Scenario 2 – The Five Questions

2. Will the total amount of throughput change?

Lost Sales Volume:

Original capacity 4,992 units/yr

Capacity if proposal is implemented

- 4,622 units/yr

Reduction in productive capacity

370 units/year

Throughput/Unit:

Price $400 /unit

Variable Expenses - 80 / unit

Throughput $320/ unit

$320 / unit

x 370 units/yr

Throughput lost - $118,400/yr

Page 47: Constraint Management Overview Chris Zephro Director, Finance - Seagate Technology TOC-ICO Certified Practitioner Six Sigma Principal Master Black Belt

Scenario 2 – The Five Questions

3. Will the operating expenses of the firm change?• No, these all remain the same

4. Will the amount of investment of the firm change?• Investment increases by $5,000

Page 48: Constraint Management Overview Chris Zephro Director, Finance - Seagate Technology TOC-ICO Certified Practitioner Six Sigma Principal Master Black Belt

Scenario 2 – The Five Questions

5. What is the real economic effect of the proposal?

Global Measurements

First Year Subsequent Years

T - $118,400 - $118,400

I + $5,000 no change

OE no change no change

Cash Flow (= T-I-OE)

- $123,400 - $118,400

Page 49: Constraint Management Overview Chris Zephro Director, Finance - Seagate Technology TOC-ICO Certified Practitioner Six Sigma Principal Master Black Belt

Scenario 3

• Let’s start with the original case.• Demand is 6,000 drives.• The firm is currently operating at a level of 4,992 drives.

• The plant engineer makes a similar suggestion, but this time the effect is to increase the time required to produce the product by 3 minutes.

• 5 minutes is added to workstation 101’s processing time.• The processing time of 102 is decreased by 2 minutes.

Page 50: Constraint Management Overview Chris Zephro Director, Finance - Seagate Technology TOC-ICO Certified Practitioner Six Sigma Principal Master Black Belt

Scenario 3 – Proposed Change

Workstation Original Processing Time

Proposed Processing Time

101 15 minutes 20 minutes

102 25 minutes 23 minutes

103 10 minutes 10 minutes

104 5 minutes 5 minutes

Total Time 55 minutes 58 minutes

Page 51: Constraint Management Overview Chris Zephro Director, Finance - Seagate Technology TOC-ICO Certified Practitioner Six Sigma Principal Master Black Belt

Scenario 3 – Least Product Cost Thinking Bridge

Cost Element Cost

Raw Materials $ 80.00

Direct Labor (58 minutes @ $ 0.30) $ 17.40

Overhead (58 minutes @ $ 1.8029) $ 104.57

Standard Unit Cost $ 201.97

Original standard unit cost $195.66

New standard unit cost $201.97

Cost increase per unit $ 6.31

Page 52: Constraint Management Overview Chris Zephro Director, Finance - Seagate Technology TOC-ICO Certified Practitioner Six Sigma Principal Master Black Belt

Scenario 3 – The Five Questions

1. What prevents the firm from increasing throughput?• Workstation 102 restricts our ability to serve all of potential

customers that would like to purchase our drives.

Page 53: Constraint Management Overview Chris Zephro Director, Finance - Seagate Technology TOC-ICO Certified Practitioner Six Sigma Principal Master Black Belt

Scenario 3 – The Five Questions

2. Will the total amount of throughput change?

Additional Sales Volume:

Capacity if proposal is implemented 5,426 units/yr

Original capacity 4,992 units/yr

Increase in productive capability 434 units/yr

Throughput/Unit:

Price $400 /unit

Variable Expenses - 80 / unit

Throughput $320/ unit

$320 / unit

x 434 units/yr

Additional Throughput $138,880/yr

Page 54: Constraint Management Overview Chris Zephro Director, Finance - Seagate Technology TOC-ICO Certified Practitioner Six Sigma Principal Master Black Belt

Scenario 3 – The Five Questions

3. Will the operating expenses of the firm change?• No, these all remain the same

4. Will the amount of investment of the firm change?• Investment increases by $5,000

5. What is the real economic effect of the proposal?

Global Measurements

First Year Subsequent Years

T + $138,880 + $138,880

I + $5,000 no change

OE no change no change

Cash Flow (= T-I-OE)

+ $133,880 + $138,880

Page 55: Constraint Management Overview Chris Zephro Director, Finance - Seagate Technology TOC-ICO Certified Practitioner Six Sigma Principal Master Black Belt

Summary - Examples

Least Product Cost

Global Measurements (T, I, OE)

Scenario 1 $17,085 ($5,000)

Scenario 2 $26,500 ($123,400)

Scenario 3 ($36,500) $133,880

Page 56: Constraint Management Overview Chris Zephro Director, Finance - Seagate Technology TOC-ICO Certified Practitioner Six Sigma Principal Master Black Belt

Constraint Management StrategyLessons from the T, I, OE Example

• Primary focus on increasing “T”

• Allow “I” to seek its natural level (usually less than before)

• Capitalize on opportunities to reduce “OE”

• But ENSURE that capacity to generate “T” is not compromised.

• Don’t waste time or endanger future “T” by actively searching for reductions in “OE” today.

Page 57: Constraint Management Overview Chris Zephro Director, Finance - Seagate Technology TOC-ICO Certified Practitioner Six Sigma Principal Master Black Belt

Why Gross Margin is Problematic

• Assumes cost per product is a reality.

• Assumes that all operations are equal.

Fixed Cost + Variable Cost

VolumeProduct Cost =

Page 58: Constraint Management Overview Chris Zephro Director, Finance - Seagate Technology TOC-ICO Certified Practitioner Six Sigma Principal Master Black Belt

Throughput Decision Support – Focusing on TU/Hr at the System Constraint?

• The Capacity Constrained Resource at the this example was developed was the Testers

Fam Model Cust TestYield TestTime YieldTestTime GM AUP TVC TU AUC Tu/Hour Revenue/qtr TVC/qtr Throughput/qtrAlpine ST340014A Disty 79% 8.70 11.01 3% 43$ 31$ $12 $41 $1.09 $2,014,818,624 $1,447,782,336 $567,036,288Alpine ST340014A OEM 79% 8.70 11.01 2% 42$ 31$ $11 $41 $1.03 $1,981,324,800 $1,447,782,336 $533,542,464Alpine ST340014A Dell 79% 15.70 19.87 2% 42$ 31$ $11 $41 $0.57 $1,108,633,255 $810,094,157 $298,539,098Alpine ST340014A HP 79% 18.70 23.67 2% 42$ 31$ $11 $41 $0.48 $930,777,653 $680,132,528 $250,645,125Alpine ST380011A Disty 78% 13.60 17.44 7% 49$ 33$ $16 $45 $0.92 $1,463,090,318 $979,304,747 $483,785,571Alpine ST380011A OEM 78% 13.60 17.44 6% 48$ 33$ $15 $45 $0.89 $1,444,136,032 $979,304,747 $464,831,285Alpine ST380011A Dell 78% 20.80 26.67 7% 49$ 33$ $16 $45 $0.62 $963,914,515 $640,314,642 $323,599,873Alpine ST380011A HP 78% 23.10 29.62 4% 47$ 33$ $14 $45 $0.49 $832,514,206 $576,560,371 $255,953,836Alpine ST3120022A Disty 71% 21.30 30.00 20% 65$ 36$ $30 $52 $0.99 $1,141,309,758 $621,451,644 $519,858,114Alpine ST3120022A OEM 71% 21.30 30.00 18% 64$ 36$ $28 $52 $0.95 $1,119,102,566 $621,451,644 $497,650,922Alpine ST3120022A Dell 71% 28.80 40.56 16% 62$ 36$ $26 $52 $0.65 $801,804,931 $459,615,278 $342,189,653Alpine ST3120022A HP 71% 31.30 44.08 16% 62$ 36$ $26 $52 $0.60 $737,763,004 $422,904,793 $314,858,211Alpine ST3160021A Disty 68% 27.00 39.71 18% 68$ 36$ $31 $55 $0.79 $894,427,183 $481,035,358 $413,391,825Alpine ST3160021A OEM 68% 27.00 39.71 17% 67$ 36$ $31 $55 $0.77 $885,179,044 $481,035,358 $404,143,686Alpine ST3160021A Dell 68% 34.75 51.10 13% 64$ 36$ $28 $55 $0.54 $656,969,564 $373,754,091 $283,215,473Alpine ST3160021A HP 68% 37.25 54.78 13% 64$ 36$ $28 $55 $0.50 $612,877,647 $348,669,924 $264,207,723Alpine+ ST3200021A Disty 50% 54.00 108.00 32% 87$ 39$ $48 $59 $0.44 $420,974,911 $187,731,398 $233,243,512Alpine+ ST3200021A OEM 50% 54.00 108.00 32% 86$ 39$ $47 $59 $0.44 $417,720,576 $187,731,398 $229,989,178Alpine+ ST3200021A Dell 50% 54.00 108.00 27% 80$ 39$ $41 $59 $0.38 $388,577,280 $187,731,398 $200,845,882Alpine+ ST3200021A HP 50% 54.00 108.00 27% 80$ 39$ $41 $59 $0.38 $388,577,280 $187,731,398 $200,845,882

Page 59: Constraint Management Overview Chris Zephro Director, Finance - Seagate Technology TOC-ICO Certified Practitioner Six Sigma Principal Master Black Belt

How Can We Increase TU/Hr?

1. Raise prices

2. Reduce the time a product spends on the Capacity Constrained Resource/Primary Control Point.

3. Reduce Truly Variable Cost.

4. Increase the yields at the CCR.

5. Ensure that only high quality material goes through the CCR.

Page 60: Constraint Management Overview Chris Zephro Director, Finance - Seagate Technology TOC-ICO Certified Practitioner Six Sigma Principal Master Black Belt

Throughput Decision SupportTransition Timing

• Takes into consideration Yield at the constraint and Truly Variable Cost.

• The primary takeaway from this is example is not to kill a Cash Cow in the middle of it’s cycle, the time to transition a product is when you can get the TU/Hour to meet or exceed the product to be replaced.

Fam Mod Cap Cust Yield TestTime Yield_TestTime AUC AUP Margin TVC TU Tu/Hour Revenue/qtr TVC/qtr Throughput/qtrCHEETAH 10K.6-36 FAMILY ST336607LC 36 Dell 85.00% 15.3 13 114$ 62$ $52 $3.40 $859,541,760 $467,470,080 $392,071,680CHEETAH 10K.6-36 FAMILY ST336607LC 36 HP 85.00% 15.3 13 137$ 62$ $75 $4.90 $1,032,958,080 $467,470,080 $565,488,000CHEETAH 10K.6-73 FAMILY ST373307LC 73 Dell 80.00% 23.8 19 100$ 143$ 30% 67$ $76 $3.20 $694,318,888 $325,310,248 $369,008,640CHEETAH 10K.6-73 FAMILY ST373307LC 73 HP 80.00% 23.8 19 100$ 158$ 37% 67$ $91 $3.83 $767,149,541 $325,310,248 $441,839,293CHEETAH 10K.7-73 FAMILY ST373207LC 73 Dell 66.00% 31.8 21 85$ 143$ 40% 65$ $79 $2.47 $518,259,456 $233,760,384 $284,499,072CHEETAH 10K.7-73 FAMILY ST373207LC 73 HP 66.00% 31.8 21 85$ 158$ 46% 65$ $94 $2.94 $572,622,336 $233,760,384 $338,861,952CHEETAH 10K.6-146 FAMILY ST3146807LC 146 Dell 73.00% 56.8 41.5 234$ 77$ $157 $2.76 $474,654,035 $156,189,576 $318,464,460CHEETAH 10K.6-146 FAMILY ST3146807LC 146 HP 73.00% 56.8 41.5 239$ 77$ $162 $2.85 $484,796,216 $156,189,576 $328,606,640CHEETAH 10K.7-146 FAMILY ST3146707LC 146 Dell 65.00% 56.3 36.6 234$ 81$ $153 $2.72 $479,219,725 $165,883,751 $313,335,974CHEETAH 10K.7-146 FAMILY ST3146707LC 146 HP 65.00% 56.3 36.6 239$ 81$ $158 $2.81 $489,459,462 $165,883,751 $323,575,711CHEETAH 10K.7-300 FAMILY 300 49.00% 215.1 105.4 418$ 82$ $336 $1.56 $224,087,849 $43,959,817 $180,128,032

Page 61: Constraint Management Overview Chris Zephro Director, Finance - Seagate Technology TOC-ICO Certified Practitioner Six Sigma Principal Master Black Belt

Impact of Yield & Test Time Improvements

• Based on Current Quarter Forecast – Impact on improvements to Disty 200GB only.

1. Reduce test time by 5% (from 54 hrs to 51 hrs) without improvement to yields:• T/Hr on the CCR goes from $.44 to $.47• Gain an additional 2,838,869 hours of Gemini Capacity for other products.

2. Improve yields by 5% (from 50% to 55%) without improvement to test times:• T/Hr on the CCR goes from $.44 to $.49• Gain an additional 4,645,421 hours of Gemini Capacity for other products.

3. Reduce test time by 5% and improve to yields by 5%:• T/Hr on the CCR goes from $.44 to $.52• Gain an additional 7,226,211 hours of Gemini Capacity for other products.

Page 62: Constraint Management Overview Chris Zephro Director, Finance - Seagate Technology TOC-ICO Certified Practitioner Six Sigma Principal Master Black Belt

Analysis with Throughput Decision Support

1. Product Emphasis

2. Product Transitions

3. Product Design

4. Product Pricing

5. Capital Investment & Process Improvement Expenditures

6. Capacity Constrained Resource Yield vs. Scrap

7. Outsourcing Decisions

8. Marketing Potential

9. Project Selection – Six Sigma & Lean

Page 63: Constraint Management Overview Chris Zephro Director, Finance - Seagate Technology TOC-ICO Certified Practitioner Six Sigma Principal Master Black Belt

The Challenge

PROBLEM… Many of these constraints are not easy to identify

How do we identify and manage constraints that are: • Not physical (not visible)

• Not easily measurable

• Apply to more than just manufacturing systems

• Pervade the organization (complex interdependency)

In other words...How to analyze complex system interactions?

Page 64: Constraint Management Overview Chris Zephro Director, Finance - Seagate Technology TOC-ICO Certified Practitioner Six Sigma Principal Master Black Belt

Logical Thinking Process

The means to IDENTIFY the system constraint and plan EXPLOITATION, SUBORDINATION, and ELEVATION.

Page 65: Constraint Management Overview Chris Zephro Director, Finance - Seagate Technology TOC-ICO Certified Practitioner Six Sigma Principal Master Black Belt

Six Logical ToolsAn Integrated Thinking Process

Intermediate Objective Map

Page 66: Constraint Management Overview Chris Zephro Director, Finance - Seagate Technology TOC-ICO Certified Practitioner Six Sigma Principal Master Black Belt

Six Logical ToolsAn Integrated Thinking Process

Page 67: Constraint Management Overview Chris Zephro Director, Finance - Seagate Technology TOC-ICO Certified Practitioner Six Sigma Principal Master Black Belt

Six Logical ToolsAn Integrated Thinking Process

Page 68: Constraint Management Overview Chris Zephro Director, Finance - Seagate Technology TOC-ICO Certified Practitioner Six Sigma Principal Master Black Belt

Six Logical ToolsAn Integrated Thinking Process

Page 69: Constraint Management Overview Chris Zephro Director, Finance - Seagate Technology TOC-ICO Certified Practitioner Six Sigma Principal Master Black Belt

Other Constraint Management Tools

Page 70: Constraint Management Overview Chris Zephro Director, Finance - Seagate Technology TOC-ICO Certified Practitioner Six Sigma Principal Master Black Belt

“Drum-Buffer-Rope”Production Scheduling

“DRUM” : The maximum PACE of the most restricted (capacity-constrained) resource“BUFFER” : A means to PROTECT the CCR and the Shipping Dock from “starvation”

•TIME, not inventory“ROPE” : A communication mechanism to guarantee material release does not exceed the PACE of the CCR

•Similar to kanban

Page 71: Constraint Management Overview Chris Zephro Director, Finance - Seagate Technology TOC-ICO Certified Practitioner Six Sigma Principal Master Black Belt

“Critical Chain”Project Scheduling and Resource Allocation

• Similar to DBR• Avoids multi-tasking & student syndrome• Eliminates resource contentions• Improves reliability of delivery date

projections• Provides a project “delivery” buffer at

the end• Smaller “assembly” buffers• No “pad” for individual activities

CCPM track record: 85% of all projects completed on time or early

Feeder Buffer

Feeder Buffer

Project Buffer

Project Delivery

Page 72: Constraint Management Overview Chris Zephro Director, Finance - Seagate Technology TOC-ICO Certified Practitioner Six Sigma Principal Master Black Belt

References1. Steven Bragg, Throughput Accounting, A Guide to Constraint Management.2. John A. Caspari, Management Dynamics: Merging Constraints Accounting to

Drive Improvement.3. Thomas Corbett, Throughput Accounting.4. Debra Smith, The Measurement Nightmare: How the Constraint

Management Can Resolve Conflicting Strategies, Policies, and Measures.5. William Dettmer, the Logical Thinking Process.6. William Dettmer, Breaking the Constraints to World-Class Performance.7. Eliyahu M. Goldratt & Jeff Cox, The Goal.8. Eliyahu M. Goldratt, Constraint Management Self Learning: Finance &

Measurements.9. Eliyahu M. Goldratt, Production the Constraint Management Way.10. Eliyahu M. Goldratt, It’s Not Luck.11. Eliyahu M. Goldratt, Constraint Management Self Learning: Project

Management & Engineering.12. Eliyahu M. Goldratt, Constraint Management Insights: Finance &

Measurements.13. Eliyahu M. Goldratt, Constraint Management Insights: Operations.14. Lawrence Leach, Critical Chain Project Management.15. William Dettmer, MBB 2004 Seagate Conference - Constraint Management

Overview.