Theory of Constraints

1
 Introduction to TOC and Synchronous
Manufacturing
• “Theory of Constraints” is a problem-solving approach or management paradigm
developed by E. Goldratt
• The bestselling novel, “The Goal” discusses it
• The applicability of TOC spans across various business areas
• Every organization has constraints (or limiting factors), which prevent itself from
achieving its goals or higher performance
• In the context of manufacturing, this constraint is often referred to as a bottleneck
• The need is to identify the constraints and do whatever necessary to manage them

2
 Goal of a firm
• The firm may choose to excel in any of the objectives including capacity
utilization, maximizing revenue, focusing on market share, etc.
• These objectives do not guarantee the long-term survival of a firm
• According to Goldratt
“THE GOAL OF A FIRM IS TO MAKE MONEY”

3
 Goldratt’s Theory of Constraints
• The Five Focusing Steps include:
• Identification of system constraints
• Exploitation of constraints
• Subordination of every other decision to that of the constraint
• Elevate the system constraint
• If the constraint is broken, go back to step 1 and don’t let inertia to be a constraint

4
 Advantages of TOC Approach
• Increased profit
• Fast improvement
• Improved capacity utilization
• Reduced lead times
• Reduced inventory

5
Constraints and Bottleneck

6
 Constraints
• Anything that can limit the performance of an organization is called a
constraint
• Capacity is defined as the total time available for production
• Constraints are classified as:
➢ Internal Constraint (Capacity)
➢ External Constraint (Market Demand)

7
 Bottleneck
• A ‘bottleneck’ is defined as any resource whose capacity is less than the
demand placed upon it
• Capacity Constrained Resource is one whose utilization is close to 100%
• Whenever the capacity of a resource is greater than the demand placed upon
it, we call it a non bottleneck resource

8
Product Flow through Bottleneck
Market
X (200 units in Y (200 units in
200 hr.) 150 hr.)

WIP Market
Y (200 units in X (200 units in
150 hr.) 200 hr.)

9
Product Flow through Bottleneck

Market
X (200 units in
Assembly
200 hr)

Y (200 units in Spare Part

150 hr) Inventory

10
Throughput Accounting

11
 Throughput Accounting: Performance
Measurements
• Throughput- Rate of customer sales generated less variable
costs, typically comprising of the cost of materials,
distribution, etc.
• Investment (Inventory): Money tied up in physical things like
inventory, machinery, real estate, etc.
• Operating Expenses: Any money spent to create throughput,
other than variable costs, like the fixed labor costs, rent, etc.
12
 Throughput Accounting: Financial
Performance Measurements
• Net Profit = Throughput – Operating Expenses
• ROI = Net Profit / Investment
• Efficiency = Throughput/ Operating Expenses
• Inventory Turns = Throughput/ Investment

13
 Throughput Accounting
• Treatment of Inventory: In TOC view, inventory is measured in dollar days
and equals the product of total dollar value of inventory and the days the
inventory is in the system
• Definition of Productivity: The set of actions that can bring a firm closer to
its goals, i.e., to increase the throughput

14
Time Concept in TOC

15
 Time Components of Production Cycle
• Setup time is the time that a part spends waiting for a resource to be set up to work
on this same part
• Process time is the time that the part is being processed
• Queue time is the time that a part waits for a resource while the resource is busy
with something else
• Wait Time is the time that a part waits not for the resource but for another part so
that they can be assembled together
• Idle Time is the unused time, i.e., the cycle time less the sum of set up time,
processing time, queue time, and wait time

16
 Saving Time
• Bottlenecks govern both throughput and inventory in the system
• An hour lost at a bottleneck is an hour lost for the entire system
• An hour saved at a non-bottleneck is a mirage

17
 Unbalanced Capacity
• In earlier chapters, we discussed balancing assembly lines
➢ The goal was a constant cycle time across all stations

• In TOC we view constant workstation capacity as a bad decision

18
Statistical Fluctuations in Process Times
(Variable) (Constant)
6 8 10 Time
Process 12 14
(A) Process Time (B)

6 8 10 12 14 6 8 10 12 14

There are two processes where A feeds B. The process time for
A is variable while that for B is fixed.

19
Drum Buffer Rope (DBR)

20
 Drum Buffer Rope (DBR)

• Drum-Buffer-Rope (DBR) is a method of synchronizing production to the

constraint while minimizing inventory (both FG & WIP)
• Every production system needs some control
• This control point is called ‘drum’
• If there is a bottle neck resource, the bottleneck is the best place for control
• If there is no bottleneck, the CCR will be made the control point or ‘drum’
• If there is neither any bottleneck resource or CCR, control can be placed
anywhere or to some divergent point

21
 Drum Buffer Rope (DBR)

• Once the bottleneck is identified, we need to do the following

things
➢To keep a ‘buffer’ inventory in front of it
➢Communicate back upstream to the first operation about the
production activity of the bottleneck
➢This communication is called ‘rope’
• The buffer inventory in front of a bottleneck is called ‘time-
buffer’
22
 Drum Buffer Rope (DBR)

• If the drum is not the bottleneck but CCR, then we need to

create two buffers: one in front of the drum and other at the
end of finished goods
• And hence we require two ropes for communication
• As the market demand may change, the additional buffer
helps to fulfil the additional demand
23
 Drum Buffer Rope
Bottleneck (Drum)

A B C D E F Market

Inventory
buffer
Communication
(time buffer)
(rope)

24
Determination of Batch Sizes

25
 Batch Sizes

• What is a batch size in an assembly line?

• One or infinity?
• Transfer batch vs. Process batch
• In an assembly line we are transferring one unit at a time
• But the entire process is running continuously on a batch of
infinity
26
 Batch Sizes

A B C
1 min/unit 0.1 min/unit 1 min/unit

A B C

Operations Process Batch Transfer Batch Operations Process Batch Transfer Batch
A 1000 1000 A 1000 100
B 1000 1000 B 300, 300, 200, 200 100
C 1000 1000 C 1000 100

27
What to Produce and How much to
Produce?

28
 What to Produce?

• The selling price of three products A,B and C are $50, $75 and $
60 per unit
• Each product requires the processing of three work centers X,Y
and Z
• Raw materials, parts and components are added at each work
center to produce the product
• The objectives are: (i) Maximize sales revenue (ii) Maximize per
unit gross profit (iii) Maximize total gross profit
29
 What to Produce?
Product A Product B Product C

WC Z WC X WC X
5 min/part 6 min/part 4 min/part
RM RM RM
$10 $30 $15

WC X WC Y WC Y
4 min/part 3 min/part 3 min/part
RM RM RM
$4 $18 $5

WC Y WC Z WC Z
10 min/part 2 min/part 5 min/part
RM RM RM
$6 $12 $20

30
 How much to Produce?

• Ratio of products sold cannot exceed 10:1 ratio between the maximum and
minimum sold to the market
• Operating expenses $3000/week, 3shifts, 5 days/week, 8 hrs/shift and for each shift
there is one X and one Y available
S.P. WC X WC Y RM
A $30 15 min 20 min $18
B $32 15 min 20 min $22
C $30 5 min 30 min $18
D $32 5 min 30 min $22 31
Product A Product B Product C Product D

WC X WC X WC X WC X
5 min/part 5 min/part 5 min/part 5 min/part

RM RM RM RM
$3 $7 $3 $7

WC X WC Y
10 min/part 10 min/part

RM RM
$5 $5
WC Y
20 min/part
32

RM
$10
 How much to Produce?

• Objectives:
➢Max revenue
➢Max per unit gross profit
➢Max gross profit
➢Max utilization of the bottleneck resource

33
Critical Chain Project
Management (CCPM)

34
 Critical Chain: The Human Side

• Estimation: Safety Factor

• Student Syndrome
• Parkinson’s Law
• Multitasking e.g. Alpha No. Shape Game
• Early Finish: Sandbagging estimates

35
 Critical Chain Project Management
• Task Dependencies vs. Resource Dependencies

A;15 C;15

B;5 D;20

36
Critical Chain Project Management
• Task Dependencies vs. Resource Dependencies

A;X;15 C;Y;15

B;X;5 D;Z;20

37
 CCPM
• According to Goldratt Institute,

“The Critical Chain is defined as the longest chain [not path] of dependent
tasks. In this case, ‘dependent’ refers to resources and resource contention
across tasks/projects as well as the sequence and logical dependencies of the
tasks themselves.”

Source: http://www.goldratt.co.uk/resources/critical_chain/
38
 Total Quality
Management (TQM) and
Statistical Quality Control
1
 Objectives/Agenda
• Introduction to Quality
• Cost of Quality
• Introduction to Total Quality Management (TQM)
• Evolution of TQM
• System Quality Issues (ISO 9000)
• Six Sigma
• Benchmarking
• Seven Basic Tools of Quality
• Statistical Quality Control
2
 Quality
• Define Quality
• Engineer: conformance to specifications
• Customer: fitness for use
• Marketing: degree of excellence
• Customer Service: a smaller number of customer complaints
• Dictionary: “a distinctive attribute or characteristic possessed by someone or
something”

3
 Quality
• Definition by Pioneers in Quality Management
• Deming: Quality is defined only in terms of the agent
• Juran: Quality is fitness for use
• Crossby: Quality is conformance for requirements
• Figenbaum: Quality means best for certain customer conditions. These conditions
are the actual use and the selling price of the product
• Boeing: Quality is providing our customers with products and services that
consistently meet their needs and expectations
4
 Quality
• ISO defines quality as
“The totality of features and characteristics of a product or service that bear on its
ability to satisfy stated or implied needs”
• Alternatively, it is defined as
“compliance with some standards or requirements as mentioned by the clients”
The ability of a product or service “to consistently meet or exceed customer
expectations”

5
 Quality in Different Applications
• Airlines: On-time, comfortable, low-cost service
• Health Care: Correct diagnosis, less waiting time, lower cost
• Food Services: Fast delivery, good ambience, good food
• Consumer Products: Durability, defect free, look and feel
• Automotive: Mileage, Safety Features, Comfort
• Utilities like Electricity: Less shut-downs, Proper voltage, safety

6
 Dimensions of Quality (Product)
• David Garvin mentioned 8 dimensions of product quality
• Performance
• Aesthetics
• Features
• Conformance
• Reliability
• Durability
• Perceived Quality
• Serviceability
7

Source: https://hbr.org/1987/11/competing-on-the-eight-dimensions-of-quality
 Strategic Quality Management (SQM)

“The process of establishing long-run quality goals and defining the approach
to meeting the goals” --- Juran and Gryna

8
Consequences of Poor Quality

9
 Consequences of Poor Quality
“NBC Connecticut- 3rd December 2014” “The Full Signal- 09th Nov 2009” “Firstpost- 30th Dec 2016”
“Honda said Wednesday it will expand a recall of “Leading mobile handset and accessory “Samsung urged its users to return the
autos equipped with defective driver's side air bags made manufacturer Nokia has issued a press device as soon as possible, and
by Japan's Takata Corp. to all 50 states, The release this morning warning that certain announced an over the air update that
Associated Press reported. The announcement comes Nokia-branded chargers may pose an would limit the charging to sixty percent
as Takata, automakers and the nation's auto safety electric shock hazard. Customers in of the capacity, to reduce incidents of
watchdog appear before a House subcommittee to
possession of these charger models are the smartphone catching fire. Samsung
testify about the faulty air bags. Under certain
conditions, the air bags can expand with too much encouraged to return them to Nokia in shares started to plummet. The US
force, spewing shrapnel at passengers. They have been exchange for repaired units.” officially recalled the Samsung Galaxy
linked to at least five deaths, yet Takata has so far Note 7. The replacement devices were to
declined to broaden the recall nationwide despite a have a green battery icon to indicate that
demand from the National Highway Traffic Safety they were replaced and safe to use. In the
Administration.” http://www.thefullsignal.com/products/2951/nokia- United States, it was the largest fire and
http://www.nbcconnecticut.com/news/national-international/NATL-
Takata-Tosses-Recall-Ball-Into-Automakers-Court-284602571.html issues-recall-14-million-defective-cell-phone-chargers burn hazard related recall ever.”
https://www.firstpost.com/tech/news-analysis/the-samsung-galaxy-note-7-fiasco-a-blow-by-blow-
account-
10
3695113.html#:~:text=On%20August%2024%2C%20a%20Samsung,it%20would%20recall%20the
%20smartphones.
 Consequences of Poor Quality
• Loss of Business
• Liability
• Productivity
• Costs

11
 3 Aspects of Quality
• Quality of Design: Inherent value of the Quality of Design
product in the marketplace
• Quality of Conformance: Degree to which the
product or service design specifications are met
Quality of Conformance
• Quality of Performance: Degree to which the
product or Service satisfies the customer from
the perspective of both quality of design and
the quality of conformance Quality of Performance
12
 Costs of Quality
• Prevention Costs: Costs of all the activities directed towards preventing defects
from happening
• Appraisal Costs: Costs of all activities concerned with the appraisal of
products/services by measuring, evaluating or auditing
• Failure Costs
• Internal Failure Costs: Costs related to the failure of a product prior to its dispatch to the
consumer
• External Failure Costs: Costs incurred by a company after the product has been delivered to
the customer and product failure has taken place

13
 Total Quality Management
• ‘Total’--- Made up of the whole
• ‘Quality’--- Degree of excellence a product or service provides
• ‘Management’--- Act, art or manner of planning, controlling, directing etc.

• Thus, TQM is the “art of managing the whole to achieve excellence”

• In other words, it refers to “a quest for quality in an organization”
14
 Total Quality Management
• There are three key philosophies in this approach
• Continuous Improvement
• Involvement of everyone
• Customer Satisfaction, i.e., meeting or exceeding customer expectations

15
 Goal of TQM

“Do the right things right, the first time and every time”

16
Introduction to Six Sigma

17
 Six Sigma
• A process improvement tool
• First introduced in Motorola in 1980
• Six Sigma allows managers to readily describe process performance using a
common metric: Defects Per Million Opportunities (DPMO)
𝑁𝑜. 𝑜𝑓 𝑑𝑒𝑓𝑒𝑐𝑡𝑠 ×1000000
• 𝐷𝑃𝑀𝑂 = 𝑁𝑜. 𝑜𝑓 𝑜𝑝𝑝𝑜𝑟𝑡𝑢𝑛𝑖𝑡𝑖𝑒𝑠 𝑓𝑜𝑟 𝑒𝑟𝑟𝑜𝑟 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡 × 𝑁𝑜.𝑜𝑓 𝑢𝑛𝑖𝑡𝑠

18
 Six Sigma Example
• Consider a situation when out of 300000 ball bearings produced, 200 are
defective. Calculate the DPMO.
• Sol: DPMO= (200*1000000)/(300000*1)=667
• Consider a situation when out of 200000 problem tickets raised by the client,
an IT company fails to fix 150 problem tickets correctly. Calculate the
DPMO.
• Sol: DPMO= (150*1000000)/(200000*1)=750
19
 Six Sigma

“The objective of six sigma process is to ensure that there are no

more than 3.4 defects for every million opportunities to produce
some feature of a part”

20
 Why the terminology “Six Sigma”
• What is sigma?
• How does 3.4 defects for every million opportunities linked to sigma?

21
DMAIC Cycle

22
 Six Sigma Quality: DMAIC Cycle
• Define, Measure, Analyze, Improve, and Control (DMAIC)
• Developed by General Electric as a means of focusing effort on quality using
a methodological approach
• Overall focus of the methodology is to understand and achieve what the
customer wants
• A 6-sigma program seeks to reduce the variation in the processes that lead to
these defects
• DMAIC consists of five steps
23
 DMAIC
• Define: Customers and their priorities
• Measure: Process and its performance
• Analyse: Causes of defects
• Improve: Remove causes of defects
• Control: Maintain Quality

24
 DMAIC
• Problem: There is a formula milk manufacturing company. In every box, the
weight is supposed to be 500 grams. The government has specified the
allowable shortfall of no more than 5 grams per box. It is however, reported
that on an average there is 496.5 grams of formula milk present in every box.

25
 DMAIC-- Define
• Define: What is the critical-to-quality (CTQ) characteristic?
• The weight of formula milk in a box

26
 DMAIC -- Measure
• Measure: How we can measure the extent of the problem?
• Acceptable limit is 495 grams
• LTL= 495
• Similarly, we define UTL= 505
• We go the market and take 100 such boxes and found that the average weight
is 496.5 grams with a standard deviation of 5.5 grams.
• What percentage of boxes are outside the tolerance limits?
27
 DMAIC -- Measure
• Our issue is rather to find what proportion of boxes have a weight lower
than 495 grams?
• z=(495-496.5)/5.5=-0.2728
• Norm.Dist(-0.2728, 0,1,TRUE)=0.384
• 38.4% of the boxes fall outside the LTL

28
 DMAIC -- Analyze
• How can we improve the capability of our processes that fills the formula
milk into the boxes?
• The goal is to Decrease Variation in the weight of the boxes

29
 DMAIC -- Improve
• How good is good enough?
• Motorola’s “Six Sigma”
• 6σ minimum from process center to nearest spec

30
 DMAIC -- Control

• Statistical Process Control (SPC)

• Use data from the actual process
• Estimate distributions
• Look at capability - is good quality possible
• Statistically monitor the process over time
31
PDCA Cycle

32
 Plan-Do-Check-Act (PDCA) Cycle
• It is an iterative method used in businesses for the controlling of continuous
improvement of processes and products
• Also known as Deming cycle
• Plan- Establish objectives and processes required to deliver the desired results.
• Do- Execution of the process
• Check- Gather data and check the conformance
• Act-Adjust the processes if found greater deviations

33
Benchmarking

34
 Benchmarking

“A process of comparison of company’s own processes and

performance metrics with some standards or with the processes and
performance metrics with other companies”

“As is” “To be”

35
 Classification of Benchmarking
• Benchmarking can be classified • American Express (for billing and collection)
• Cummins Engines and Ford (for factory floor layout)
(on the basis of unit) as: • Florida Power and Light (for quality improvement)
• Honda (for supplier development)
• Internal Benchmarking • Toyota (for quality management),
• Hewlett-Packard (for research and product
• Competitive Benchmarking development)
• Saturn (a division of General Motors) and Fuji Xerox
• Functional Benchmarking (for manufacturing operations)
• DuPont (for manufacturing safety)
• Generic Benchmarking

36
 Benchmarking Wheel
• The purpose of benchmarking process models is to describe the steps that
should be performed when conducting a benchmarking study

37
Benchmarking Wheel
Plan
Improve • Determine the process to benchmark based on
• Plan the implementation of the organization’s critical success factors
improvements • Understand and document own process
• Implement improvements • Measure performance of own process
and monitor the
implementation progress

Analyze
• Identify gaps in Find
performance and the • Identify benchmarking
root causes for the gaps partners

Collect
• Understand and
document the
benchmarking
partners’ performance
and practice

38
Seven basic tools of quality

39
 Seven basic tools of quality
Tool Pictorial Presentation Purpose
Type
Check Sheet Range Data Collection
Makes Process Steps
Flow Chart
Visible
Histogram Frequency Distribution

Pareto Diagram Trivial Many/Vital Few

Cause & Effect Root Cause Analysis

Scatter Diagram Correlation

Control Charts Controllability 40

Data Collection Forms/Checksheets

Helps to standardize the data

collection
The same data can be used to
create histograms

41
Flow Chart

The given flowchart depicts

the process steps as a part
of a SIPOC (Supplier,
Inputs, Processes, Outputs
and Customers) analysis
It is used in the Define stage
of the analysis

42
Pareto Chart

Break down the problem into

relative contributions of its
components
The idea is that large percentage
of the problems are due to a small
percentage of causes

43
Fishbone Diagram

Shows hypothesized
relationships between
potential causes and
the problem under
study.

44
Opportunity Flow Diagram

Used to separate
the value-added
from the non-value
added steps in the
process

45
Control Chart

Time sequenced charts

depicting the plotted value of
a statistic including a
centreline average and one or
more control limits

46
Run Chart

Depicts trends in data over

time, and help us in
understanding the magnitude
of the problem in the define
stage itself
Typically, they plot the median
of the process

47
Statistical Quality Control

48
 Statistical Quality Control
• Quantitative aspects of Quality Management
• Processes usually exhibit variations in their output
• Variations that are caused by factors clearly identifiable and possibly
managed are called assignable variations
• A poorly trained employee that creates variation in finished product
output
• Variation that is inherent in the process is called common variation
• A molding process that always leaves “burrs” or flaws on a molded item
49
 Taguchi’s View of Variation
• Traditional view is that quality within the Lower Specs and Upper Specs is
good and that the cost of quality outside this range is constant
• Taguchi views costs as increasing as variability increases, so seek to achieve
zero defects and that will truly minimize quality costs

50
Taguchi’s View of Variation

High

Incremental
Cost of
Variability

Zero

Lower Target Upper

Spec Spec Spec
51
 Process Capability Index
• As a production process produces items small shifts in equipment or systems
can cause differences in production performance from differing samples
• Shows how well parts being produced fit into design limit specifications
• It is measured as follows (depending upon whether the process means are
centered between LSL and USL
CP = (USL – LSL) / 6

 X − LSL USL - X 
C pk = min or 

 3 3  52
 Process Capability Index
• Problem: There is a formula milk manufacturing company. In every box, the
weight is supposed to be 500 grams. The government has specified the
allowable shortfall of no more than 5 grams per box. It is however, reported
that on an average there is 496.5 grams of formula milk present in every box.
• Calculate the Process Capability Index

53
Control Charts

54
 Control Charts
• It is a tool to determine whether any manufacturing process is in a state of
control
• It mainly consists of:
• Different points representing a statistic (like, mean, range, proportion) of
measurements of any quality characteristic in samples drawn from the manufacturing
process at different times
• A center line
• UCLs and LCLs

55
 Control Charts
• Mean Chart (Bar chart) measures central k

tendency of a process x i

x= i =1

• Mean Control Chart or 𝑥ҧ chart k

where
• If the process standard deviation 𝜎 is
known, then 𝑥ҧ chart is defined as x = Average of sample means
• 𝑈𝐶𝐿 = 𝑥ҧ + 𝑧𝜎/ 𝑛 and 𝐿𝐶𝐿 = 𝑥ҧ − 𝑧𝜎/ 𝑛 xi = mean of sample i
where n is the sample size of each sample k = number of samples

56
 Mean Chart
• A quality inspector took 5 samples 1 2 3 4 5
each with 5 observations, measuring A 2.25 2.24 2.30 2.28 2.34
the diameter of ball bearings. The
B 2.38 2.23 2.34 2.23 2.21
same has been shown in the table
C 2.21 2.31 2.26 2.38 2.29
below , where each observation is
taken in millimetres (mm). Find 3 D 2.36 2.20 2.29 2.35 2.30
control limits for diameters. It is E 2.31 2.33 2.35 2.30 2.36
known that the standard deviation for
the process is 0.1 mm.

57
 Solution
Sample
Means 2.302 2.262 2.308 2.308 2.3

UCL= 2.296+ 3*0.1/√5 = 2.4302

LCL= 2.296- 3*0.1/√5 = 2.1618

58
Sample Range for Process Variability

x Chart Control Limits

UCL = x + A 2 R
LCL = x - A 2 R

59
60
 Mean Chart
• In the previous example, determine control limits
• Sol: Average of Range = 0.138
• A2 for a sample of size 5 = 0.577
• UCL= 2.376, LCL = 2.216

61
 Range Chart
• For monitoring process dispersion
R Chart Control Limits
UCL = D 4 R
LCL = D3 R

62
 Range Chart
• In the previous example, determine control limits for sample range
• D3=0, D4= 2.11 for n=5
• Average R = 0.138
• UCL= 0.2912
• LCL= 0

63
 Control Charts for attributes: p-Chart
• p-charts (prepared for fraction of defectives)
𝑇𝑜𝑡𝑎𝑙 𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑑𝑒𝑓𝑒𝑐𝑡𝑖𝑣𝑒 𝑢𝑛𝑖𝑡𝑠 𝑜𝑓 𝑎𝑙𝑙 𝑠𝑎𝑚𝑝𝑙𝑒𝑠
• 𝑝ҧ = 𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑠𝑎𝑚𝑝𝑙𝑒𝑠 ×𝑆𝑎𝑚𝑝𝑙𝑒 𝑠𝑖𝑧𝑒

𝑝ҧ 1−𝑝ҧ
• 𝑠= 𝑛
where 𝑝ҧ is the fraction of defectives

• 𝑈𝐶𝐿 = 𝑝ҧ + 𝑧𝑠 and 𝐿𝐶𝐿 = 𝑝ҧ − 𝑧𝑠 or 0

64
 p-Chart

Construct a control chart Sample n Defectives

that will describe 99.5% of 1 100 4
the process variation. 2 100 2
3 100 5
4 100 3
5 100 6

65
 p-Chart
• Here
20
𝑝ҧ = = 0.04
500

0.04(1−0.04)
𝑠= =0.0196
100

66
 Control Charts: c-Chart
• c-charts used to control the number of occurrences
• 𝑐ҧ = 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑑𝑒𝑓𝑒𝑐𝑡𝑠 𝑝𝑒𝑟 𝑠𝑎𝑚𝑝𝑙𝑒
• 𝑈𝐶𝐿 = 𝑐ҧ + 𝑧 𝑐ҧ and 𝐿𝐶𝐿 = 𝑐ҧ − 𝑧 𝑐ҧ or 0
20
• In the previous example, 𝑐ҧ = 5
=4

67
Control Charts
Acceptance Sampling

69
 Statistical Quality Control: Lot Acceptance
Sampling
• Popularized by Dodge and Romig
• It is a sampling scheme and a set of rules for making decisions
• Acceptance, Rejection, or indecisiveness (or repeat sampling)
are based on the count of defectives obtained in any sample(s)

70
 Lot Acceptance Sampling
• Lot Acceptance Sampling or Acceptance Sampling is used under any of the
three following cases:
➢Testing is destructive
➢The cost of full inspection is very high
➢Time taken for full inspection is too long
• Single Sampling Plan
• Double Sampling Plan
71
 Single Sampling Plan
• A sample of size ‘n’ is selected
• Once the number of defects present in the sample exceeds a fixed pre-
chosen no. ‘c’, the entire batch is rejected
• Else the entire batch is selected

72
 Double Sampling Plan
• A sample of size ‘n1’ is selected first
• If the no. of defects exceeds ‘c1’, the batch is rejected
• If the no. of defects is less than ‘c2’, the batch is accepted, where c1>c2
• If the no. of defects fall within (c2, c1), then another sample of size ‘n2’ is
drawn and the no. of defects in the new sample are checked
• If the sum of defects in both the samples exceed c3, batch is rejected else
batch is accepted

73
 Acceptance Sampling
• Acceptable Quality Level (AQL)
• Lot Tolerance Percent Defective (LTPD)
• Risks in Acceptance Sampling are of two types:
• Type I Error or Producer’s Risk (α)
• Type II Error or Consumer’s Risk (β)

74
 Example
• Producer of electric bulb claims of having 5% defective bulbs in a lot of
1000. A consumer devices a single sampling plan where he draws a
sample of size 50 (with replacement). If he finds more than three defective
bulbs, he rejects the entire lot, else, he accepts the lot. Calculate the
probability of accepting the batch.
• Sol: In Excel use, BINOM.DIST(3,50,0.05,TRUE)
• 0.7844

75
 Example
• Producer of electric bulb claims of having 4% defective bulbs in a lot of
1000. A consumer devices a single sampling plan where he draws a
sample of size 50 (without replacement). If he finds more than three
defective bulbs, he rejects the entire lot, else, he accepts the lot. Calculate
the probability of accepting the batch.
• Sol: In Excel use, HYPGEOM.DIST(3,50,40,1000,TRUE)
• 0.8658

76
 Operating Characteristics Curve
• It helps a sampling plan to discriminate between good lots and bad lots
• It is a plot between % defectives in a lot or batch vs. the probability of
acceptance of the lot
• The degree to which a sampling plan can discriminate between good lots and
bad lots is a function of the steepness of the graph’s OC curve

77
 Operating Characteristics Curve
P (of P P (of P OC Curve
defectives) (acceptance) defectives) (acceptance)
1.000

0.000 1.000 0.090 0.021 0.900

0.800
0.010 0.953 0.100 0.011 0.700 n=80, c=2
0.020 0.784 0.110 0.005 0.600

0.500
0.030 0.568 0.120 0.003 0.400

0.300
0.040 0.375 0.130 0.001
0.200
0.050 0.231 0.140 0.001 0.100

0.000
0.060 0.134 0.150 0.000

0.070 0.075 0.160 0.000

0.080 0.040 P (acceptance) 78

 Operating Characteristics Curve: Sampling
Plan
c LTPD/AQL n. AQL
Consider a situation where the vendor has an AQL 0 44.890 0.052
of 2% defectives and is okay with a producer’s risk 1 10.946 0.355
of 5%. Further, the buyer considers 8% or more 2 6.509 0.818
defectives as unacceptable and wants to ensure that 3 4.890 1.366
it has a consumer’s risk ok no more than 10%. 4 4.057 1.970
Using the given information calculate ‘n’ and ‘c’ 5 3.549 2.613
6 3.206 3.286
AQL=0.02, LTPD=0.08, α=0.05, 7 2.957 3.981

β=0.1 8 2.768 4.695

9 2.618 5.426 79
Just In Time and Lean
Manufacturing

1
 Lean Production System

• Primary focus has been on eliminating as

much waste as possible
• It includes elimination of unnecessary
processing steps, excessive inventory, etc.
• The philosophy of Lean Manufacturing is
rooted into Just-In-Time manufacturing
pioneered at Toyota
2
 Toyota Production System

• The aims were

• To improve quality
• To improve efficiency
• Based on 2 core values
➢ Continuous Improvement through elimination of waste
➢ Respect for People

3
 Lean Manufacturing

• “Supply on Demand Manufacturing”

• Supplying the customers exactly what they want,
exactly when they want and, in the process,
eliminating all the waste that have occurred
• The idea is to reduce the overall inventory levels
whether it is raw material inventory, WIP inventory or
finished goods inventory
• In short “Nothing will be produced unless
needed”
4
 Lean Supply Chains

• Lean Suppliers
• Lean Procurement
• Lean Manufacturing
• Lean Warehousing
• Lean Logistics
• Lean Customers

5
 Takt Time
• “Takt” Time: Average unit production time needed to
meet any customer demand
Available Time
Takt Time =
Product Demand
• Cycle Time: It is the maximum time allowed at each
workstation to complete its set of tasks on a unit
• Consider the following sequence of activities in automated
car washing
Scrubbing Rinsing Drying
2 minutes 4 minutes 2 minutes
6
 Example 1
• One 8- hour shift = 60 min/hr * 8 hrs = 480 min/shift
• Breaks = 30 min/shift
• Start up meeting = 10 min/shift
• Lunch = 30 min/shift
• End of shift clean up = 10 min/shift
• Machine set up time = 15 min/shift
• Net operating time available = …………………min/shift
• Customer demand = 50 units/shift
• Takt time = …?………minutes per unit
7
 Example 2
• An automobile assembly line is scheduled to produce 10 four-
door sedans, 6 3-door hatchbacks and 4 station wagons during
the upcoming 4-hour period. Sequence these starts to balance
the production rate.

• Takt=240/20=12 minutes
• Takt (Sedan)=24 min, Takt (H)=40 min, Takt (W)=60 min
• Sedan is released 0-24-48-72-96-120 in 2 hours
• Hatchback released 0-40-80-120
• Wagon released 0-60-120
• So, sequence is: SHWSHSWSHS (This is for the first 2 hours and repeats
for the next 2 hours)
8
Lean Layouts
• Group Technology
• JIT Production
• Quality At Source

9
 Group Technology or Cellular
Layouts
• Workstations are grouped together to form a cell
• The cells are formed on the basis of similarity of
processing on similar items or part families
• The cells in turn behave as mini-product layouts
• In a cell, machines are arranged to perform all the
necessary operations required to the items with some
minor variations (skipping of operations)
 Group Technology or Cellular
Layouts
Products Processes

A Mill, Drill, Polish

B Solder, Grind

C Solder, Grind, Polish

D Mill, Drill, Grind, Polish

Mill Drill Solder Grind Polish
A 1 1 0 0 1
B 0 0 1 1 0
C 0 0 1 1 1
D 1 1 0 1 1
 Just In Time Production

• A production process in which production and

transportation is done only when customer requires it and
the same amount what is demanded
• Typically applied to repetitive manufacturing
• The ideal lot size or process batch under JiT is one
• Vendors are even required to ship several times a day
• Results in lower levels of inventory and reduction in lead
times
12
 Suppliers’ Reaction to Just In Time

Newman (1994) reported that the suppliers in Japan charge their JIT
customers, a premium of 5% in the wholesale price to switch to JIT
mode

Source: Newman, G. (1993). As just-in-time goes by. Across the Board, 30 (8), 7.

13
 Quality at Source

• The philosophy of making factory workers

personally responsible for the quality of their output
• Workers are expected to make the part correctly the
first time
• If there is a problem, then they need to stop the
process immediately

14
Lean Production Schedule
• Kanbans
• Minimized Set up time
• Uniform Plant Loading

15
 Kanban

• Japanese word for “Signal Card” and helps to

visualize the work
• Controls the flow of resources in a production
system by replacing exactly the amount what has
been consumed
• To replenish parts in “Just in Time”

16
 Kanban

Source: http://cuddletech.com/?p=723

17
 Benefits of Kanban
• Reduces inventory
• Improves flow
• Prevents overproduction
• Places control at the operations level (with the operator)
• Creates visual scheduling and management of the process
• Improves responsiveness to changes in demand
• Minimizes risk of inventory obsolescence
• Increases ability to manage the supply chain
18
 Containers in a Kanban System

• Kanban is based on the simple idea of replacement

of containers of parts, one at a time.
• Containers are reserved for specific parts, are
purposely kept small, and always contain the same
standard number of parts for each part number
• At Toyota, the containers must not hold more than
about 10% of a day’s requirements.

19
 Kanbans
• No. of Kanbans is given by
DL (1 + S )
k=
C

k: #of Kanbans
D: Demand in unit lead time
L: Lead Time
S: Safety Stock as a percentage
C: Size of the Kanban

20
 Kanbans: Example 1
• Given the above setting, whether the
Demand= 75/hr
system will be able to meet the demand? Or
Buffer What is the average capacity?

1 2 • If Kanbans of size 5 are used for stage 1

output, what is the maximum lead time to
80/hr refill the container (buffer)?
125/hr
(8 hrs up and 2 hrs • What is the maximum lead time demand?
down)
• How many Kanbans are required for stage
1?
• Now consider the case when machine at
stage 1 requires preventive maintenance for
0.5 hours in every 2 hours with the capacity
being reduced to 110/hr. Calculate the
above for this case.
21
 Kanbans: Example 2

• The daily demands for a product is distributed with the following

probability distribution:
Demands 3 4 5 6 7

Probability 0.1 0.25 0.3 0.25 0.1

• If the company has a policy of keeping the safety stock under the 2σ
policy, calculate the number of Kanbans required if the size of each
Kanban is 2.

22
 Kanbans : Example 3

• An industrial seal manufacturer uses consistently 2500 rubber

rings a week. The supplier’s lead time for manufacturing the
connectors is 3 weeks. In order to assure that there will
always be parts available the seal manufacturer has asked that
a 3-week safety stock be on hand. The manufacturer also
wants rings shipped in re-useable containers of 500.

• How many Kanbans are required?

23
 Kanbans : Example 4

Buffer
Demand= 100/hr

1 2

150/hr 125/hr

Machine 1 remains dysfunctional for either 2 hours in every 10 hours or

1 hour in every 2 hours with respective probabilities 0.8 and 0.2.
Calculate the average lead time demand and the number of kanbans of
size 5 required

24
 Minimized Set up time
• Changing over from one product to the next
product involves set up time
• Higher set up times affects efficiency and results
in loss of production
• Further, higher set up times could also lead to
produce in higher batch sizes, as against the
requirement of producing multiple products with
smaller batch-sizes
• Set up time reduction is built on the idea of
“Single-Minute Exchange of Die” introduced by
‘Shingeo Shingo’ at ‘Toyota’

25
 Uniform Plant Loading

• It refers to setting a firm monthly production

plan
• It helps in smoothing the production line

26
Waste (or Muda)

27
 Waste in Lean Manufacturing
• Seven Wastes under TPS include:
➢ Transportation
➢ Inventory
➢ Motion
➢ Waiting
➢ Over-Processing
➢ Over-Production
➢ Defects
28
 Impact of Waste
• Extra manpower & machines
• Storage space / Warehouse
• Extra payments for interest on Loans
• Extra Power
• Extra parts & materials
• Hidden Problems

29
 Value Stream Mapping
• It is a special type of
flowcharting tool
• It helps to visualize
product flows through
various processing steps
• It further helps to
illustrate information
flows for controlling the
flow through a process
30
SUPPLY CHAIN
MANAGEMENT
1
 LOGISTICS
• An organization faces challenge in moving the raw
materials from the suppliers to the plant and from plant
to the final customers through a warehouse and a
retailer
• ‘Logistics’ is the movement of raw materials to the
plant and finished goods from the plant to the customer
• ‘Inbound logistics’ focus on moving raw materials into the
manufacturing facility whereas ‘Outbound logistics’ focus on
movement of goods from the manufacturer
• Logistics decisions also focus on locating warehouses
and plants and distributing materials between them
2
 SCM AND LOGISTICS

• According to Institute of Supply Management, Logistics is

defined as

“an entire process of materials and products moving into,

through and out of the firm”

• SCM deals with coordinating the flows in the entire channel

from the point of origin to the point of consumption

3
 A COMPANY’S SUPPLY CHAIN
Focal Firm DC 1

CWH

Manufacturer
DC 2

Retailers
4
 SUPPLY CHAIN MANAGEMENT

• Mentzer (2001) defined Supply Chain as follows:

• ‘Basic Supply Chain’ consists of a firm, its immediate supplier and

immediate customer

• ‘Extended Supply Chain’ also includes the supplier of the immediate

supplier and customer of immediate customer

• ‘Ultimate Supply Chain’ includes all the firms involved in all upstream
and downstream flows of material, finances, information and services
from the initial supplier to the final customer

5
 SUPPLY CHAIN MANAGEMENT
• Crudely defining, a supply chain is composed of
independent firms interconnected to each other
through material, informational and financial flows

• The above definition signifies “a flow based”

definition

• Harland (1996) and Christopher (1998) extended

the scope of SCM from managing flows to
managing networks involved in the exchange
process
6
COMPONENTS OF A SUPPLY CHAIN

• A simple vertical supply chain

comprises of the following entities:
• Supplier
• Manufacturer
• Distributor
• Retailer
• Customer

7
 FUNCTIONS IN A SUPPLY CHAIN

• Procurement
• Production
• Distribution
• Storage
• Retailing
• Forecasting

8
 SUPPLY CHAIN MANAGEMENT
(PROCESS CYCLE)
Customer
Customer Order Cycle
Retailer

Stakeholders
Replenishment Cycle
Distributor
Manufacturing Cycle

Manufacturer
Procurement Cycle

Supplier
Each stage can
correspond to a
buyer-supplier dyad 9
 PUSH VS PULL IN SUPPLY CHAIN

• If the execution of processes happen in response to customer

order, it is called Pull in Supply Chain
• It is reactive in nature
• Operates in a certain environment
• If the execution of processes happen in anticipation of
customer order, it is called Push in Supply Chain
• It is speculative in nature
• Operates in an uncertain environment

10
 DECISION PHASES IN SUPPLY CHAINS
• SC Strategy or Design (Strategic • SC Planning (Tactical Planning)
Planning) • Demand Planning
• Addressing Customers’ varying • Service Level Decision
needs • Supplier Selection
• Roles of the various SC stages • SC Operation (Operational
• Value provided at each stage Planning)
• Facility Location • Replenishment Decisions
• Mode of Transport • MPS
• Layout Decisions • Routing

11
WHAT IS THE RIGHT SUPPLY
CHAIN FOR ANY PRODUCT?

12
 COSTS IN A SUPPLY CHAIN

• Any supply chain performs two distinct kinds of

functions
• Making the products available from the supplier to
the final customer (Physical Function)
• Physical costs include cost of production, transportation
and inventory storage
• To reduce the mismatch between the demand and
supply (Market Mediation Function)
• Market Mediation costs include cost of markdowns and
stock-outs

13
 EFFICIENT VS. RESPONSIVE SUPPLY
CHAINS

Efficient Supply Chains Responsive Supply Chains

• Predictable or Stable • Unpredictable or Unstable
Demand Demand
• Long Product Life Cycle • Short Product Life Cycle
• Low Product Variety • High Product Variety
• Low Contribution Margin • High Contribution Margin
• Low Stock-out Cost • High Stock-out Cost
• Efficient supply chains seek • Responsive supply chains
to minimize physical costs seek to minimize market
mediation costs

14
FISHER’S CLASSIFICATION OF SUPPLY
CHAINS

Demand Uncertainty

Low (Functional High (Innovative

Products) Products)

Efficient Supply Responsive Supply

Chains (Grocery, Chains (Fashion
Basic Apparel, Food) Apparel, Computers)

15
 ACHIEVING STRATEGIC FIT

Responsive

Mismatch

Responsive
Spectrum

Mismatch

Efficient

Low Uncertainty High 16

 STABLE VS. EVOLVING PROCESS

Stable Process Evolving Process

• Less Breakdowns • Frequent Breakdowns
• Stable or higher yields • Variable or lower yields
• More supply sources • Less supply sources
• Less quality problems • More quality problems
• Dependable lead time • Variable lead time
• Reliable suppliers • Unreliable suppliers

17
 LEE’S CLASSIFICATION OF SUPPLY
CHAINS
Fisher’s Demand Uncertainty

Lee
Low (Functional High (Innovative
Products) Products)

Low Efficient Supply Responsive Supply

(Stable Chains (Grocery, Chains (Fashion
Supply Process) Basic Apparel, Food) Apparel, High End
Uncertainty Computers)
High Risk Hedging Supply Agile Supply Chains
(Evolving Chains (Hydro (Telecom,
Process) Electric Power, Food semiconductor)
Production) 18
 OBJECTIVES IN A SUPPLY CHAIN
• Some of the most common SC specific objectives are:
• Profitability
• Reliability
• Flexibility
• Responsiveness
• Efficiency
• Higher Turnover Rate
• Coordination/Collaboration

19
COMMON PERFORMANCE METRICS IN A
SUPPLY CHAIN
• Fill Rate or Service Level
• Confirmed Fill Rate
• Response Delay
• Delay
• Order Fulfillment Cycle Time
• Cycle Time
• Throughput
• Inventory Levels
• Resource Utilization
• Sales
• Sales/Inventory Ratio or Inventory Turnover ratio
• Cash to Cash Cycle
• Channel Efficiency

20
 PROBLEM ON FILL RATE
• Calculate the overall fill rate and the response delay for the set
of orders
Orders Size Requested Negotiated Partial Fulfillment
Date Date Factor
O1 45 10.02.21 15.02.21 0.75
O2 50 12.02.21 15.02.21 0.8
O3 65 12.02.21 15.02.21 1
O4 40 13.02.21 15.02.21 0
Orders Amount Delivered Date
O1 22 09.02.21
11 10.02.21
12 13.02.21
O2 25 12.02.21
25 15.02.21
O3 60 12.02.21
5 14.02.21
O4 25 12.02.21
15 13.02.21 21
PROBLEM ON INVENTORY TURNOVER

• Compute the inventory turnover (or inventory turnover ratio)

and the average selling period from the following table:

Particulars Value
Annual Sales $50,000,000
Gross Profit $12,000,000
Beginning Inventory 25,000 units
Ending Inventory 63,000 units
Unit Cost $100

22
PROBLEM ON INVENTORY TURNOVER

Cost of Goods Sold $50,000,000-$12,000,000

=$38,000,000
Average Inventory (25,000+63,000)/2=44,000 units
Value of Average Inventory 44000 * $100 = $ 4,400,000
Inventory Turnover Ratio 38000000/4400000=8.64
Average Selling Period 365/8.64=42.25 days

23
 MODERN TRENDS AND KEY ISSUES IN
SUPPLY CHAIN MANAGEMENT

• Information Sharing & Bullwhip Effect

• Supply Chain Coordination
• Vendor Managed Inventory
• Drop Shipping vs. Direct Shipping
• Cross-Docking/Consolidation Warehousing
• Omni Channel Retailing (Showrooming & Webrooming)
• Predictive/Anticipatory Shipping by Amazon
• 3PL & 4PL
• Vehicle Routing
• Reverse Logistics (Gatekeeping and Avoidance)
24