Value Engineering and Theory of Constraints 1

VALUE ENGINEERING
AND THEORY OF
CONSTRAINTS
Theory of Constraints
• Theory of Constraints (TOC) is a process of identifying and
managing constraints in the making of products or in the
providing of services.
• It also describes methods to maximize operating income
when faced with some bottleneck and some non-bottleneck
operations.
• TOC focuses on manufacturing activity. It focuses the
manager’s attention on the constraints, or bottlenecks that
slow the production process.
• TOC emphasizes on the improvement of throughput
(overall rate of manufacturing output) by removing or
reducing the bottlenecks in the production process that
slow the rate of output.
Theory of Constraints
• Nonbinding Constraints
Manufacturing and distribution processes that do not affect
throughout operation and that receive less attention.
• Binding Constraints
Bottlenecks. Fast throughput enables firms to be better
prepared for quick product changeovers and changes in
customer preferences.
Three Measurement in Theory of Constraints
1. Throughput contribution
It is the amount of a product or service that a company can produce and
deliver to a client within a specified period of time. Throughput
contribution is computed as:
Revenue – Directs Materials & Cost of Goods Sold
2. Investments
Sum of materials costs in direct materials, work-in-process, and finished
goods inventories; R&D costs; and costs of equipment and buildings.
3. Operating Costs
All costs of operations (other than direct materials) incurred to earn
throughput contribution. Operating costs include salaries and wages, rent,
utilities and depreciation.
Steps in Theory of Constraints Analysis
Step1: Identify the Binding Constraints
• In the first steps, the management accountants works with manufacturing managers
and engineers to identify binding constraints by developing a network diagram of the
flow or production.
• A network diagram is a flowchart of the work done that shows the sequence of
processes and the amount of the time required for each. The purpose of the network
diagram is to help the management accountant look for signs of a bottleneck.
• A bottleneck often is indicated by a process with relatively large amounts of
inventory accumulating, or where there are long lead times.
• Task analysis which describes that activity of each process in detail also could be
used to identify binding constraints.
Step 2:Determine the Most Efficient Utilization for Each Binding Constraint
• In this step, the management accountant determines how to most effectively utilize the
firm’s resources.
• The approach differs depending on whether there is one, or two or more products. If
there is one product, the management accountant looks for ways to maximize the flow
of production through the constraint.
Step 3:Manage the Flows Through the Binding Constraint
• The objective is to manage the flow of production in and out of the binding constraint to
smooth the flow of production throughout the plant.
• The orderly scheduling of production prevents the building of materials or work-in-
process inventory at various process.
• An important tool for managing product flow in this context is the drum-buffer-rope
(DBR) system which is a system for balancing the flow of production through a binding
constraint.
Drum Buffer Rope for Manufacturing Systems
In manufacturing, the drum is still the bottleneck. The buffer is the
material upstream of the bottleneck and has to make sure that the
drum is never starved. The rope is a signal or information from the
buffer to the beginning of the line. If the drum processes parts, the
buffer moves forward. The rope is a signal when material is taken out,
and gives an information to replenish another part at the beginning
of the
line as shown in the Illustration below.
Step 4:Add Capacity to the Constraint
• As a longer-term measure to relieve the constraint and improve cycle time, management
should consider adding capacity to the constraints by adding new or improved machines
and/or additional labor.
Step 5:Redesign the Manufacturing Process for Flexibility and Fast Cycle
Time
• The most complete strategic response to the constraint is to redesign the manufacturing
process, including the introduction of new manufacturing technology, deletion of some
hard-to-manufacture products, and redesign of some products for greater ease of
manufacturing.
• Simply removing one or more minor features on a given product might speed up the
production process significantly.

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