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KNGX NOTES
ACCT2522

9. MANAGING TIME – THE THEORY OF

CONSTRAINTS
9.1 TIME BASED MANAGEMENT

Time Based Management: an approach that focuses on compressing the time it takes to undertake all of
the business’ processes

- Time taken to develop new products/services

- Time taken to fulfil customer orders for products and services

Why is it important to manage time?

- Time is an important driver of both costs and revenue

- Dictates the rate at which products and services are produced
o Timely delivery
o Rate of revenue generated
- Determines how long resources are tired up during processes
- Delays often cause a build-up of inventories and associated carrying costs

In addition; for some businesses, innovation is a critical success factor. They compete on the basis of time to
develop new products, and delays in the launch of new products will lead to a loss of customers and market
share

DEVELOPING NEW PRODUCTS AND SERVICES

Measures to assess the product development processes:

- Time-to-market: (or new product development time) is the time from the identification of an initial
concept through to the release of the product (or service) for sale
- Break-even time: measures the time from the identification of an initial concept through to when the
product has been introduced and has generated enough profit to pay back the original investment

The life cycle of a new product consists of four phases:

1. Product planning and initial concept design

2. Product design and development
3. Production
4. Distribution and Customer Support

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Reduces time taken:

- Having a good design

o Involve a cross-functional team and suppliers
- Building relationships with a good supplier

TIME TAKEN TO FULFILL CUSTOMER ORDERS

Customer Response Time: the time between a customer placing an order for a product or service and
receiving that order and is made up of three major elements

1. Order receipt time: the time between sales department receiving a customer order and placing that
order with the manufacturing department
2. Production Cycle Time: the period from when the order enters the manufacturing department to
when the finished products are ready for delivery
o Waiting time: the time between an order being received by manufacturing and production
commencing
o Production time: the duration of the manufacturing process
3. Delivery Time: the time taken to deliver the finished order to the customer

Time taken to fulfil customer orders can be reduced through value analysis (waiting time is NVA)

Many businesses use the average cycle time which is the ratio of total processing time to the total goods units
produced.

RELIABILITY IN MEETING SCHEDULED DELIVERY DATES

Delivery Schedule Reliability: is the extent to which a business meets predetermined delivery schedules

IDENTIFYING AND MANAGING THE DRIVERS OF TIME

Time driver: any factor that changes the duration of an activity

- Poorly structured order, production and delivery processes

- Bottlenecks in order, production and delivery processes
- Poor quality
- Inefficient inventory management
- Poorly structured R&D processes in developing new products and services

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9.2 NATURE OF CONSTRAINTS

Constraint: anything that stops you from achieving higher performance in relation to your goal

Internal Constraints External Constraints

- Materials: processes are starved of - Market demand: insufficient demand

materials
- Capacity: different machine capacities
- Logistical: the resource oscillates
between excess/insufficient capacity
*Planning and control issues and
variability
- Managerial: strategies and policies
- Behavioural: employee behaviour
from customers
- Supply: insufficient raw materials due to
unreliable suppliers or lack of suppliers
*Note: Materials constraint differs from supply
constraint as the lack of materials is due to a
previous process that prevents subsequent
processes from having the materials to function

Binding Constraint

- Biggest obstacle in achieving a goal

- The weakest link in the value chain or the ‘bottleneck’

9.3 THEORY OF CONSTRAINTS (TOC)

Global Goal

- To make more money now and in the future!

- But…
1. Organizations face constraints
2. The binding constraint limits performance
3. Manage the binding constraint, instead of focusing on cost cutting

TERMINOLOGY AND MASUREMENT

Theory of Constraints (TOC) Objective: Increase throughput (T) while decreasing Inventory (I) and Operating
Expense (OE)

Three main components:

1. Throughput
2. Inventory
3. Operating expense

Net Profit T - OE

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1. THROUGHPUT (T)

Throughput (T): the rate at which a company Selling price – Unit Level Variable costs
generates money through sales

- Assumption: variable costs = direct material costs (only)

o Excludes direct labour and variable MOH costs! (these are classified under OE)
- A very short-term focus is adopted

Why DM is the only ‘variable’ manufacturing cost:

- Focuses on unit-level variable cost

- Sometimes labour resources provided =/= labour resources required
- In reality you do not pay employees per output, but rather per hour/per shift/salary etc.

2. INVENTORY (I)

Inventory (I): money invested in purchasing things that it intends to sell

- Inventory: products produced for sale but only the direct material component!
- Property, plant and equipment (book value)

3. OPERATING EXPENSES (OE)

Operating Expenses (OE): all costs that are incurred to turn inventory into throughput

9.4 APPLYING TOC TO MANAGE THE BINDING CONSTRAINT

SYSTEMATIC CONSTRAINT MANAGEMENT

Five steps to manage the binding constraint:

1. Identify the binding constraint

2. Exploit the binding constraint
3. Subordinate all other activities
4. Elevate the binding constraint if necessary
5. Repeat steps 1-4 (for another constraint)

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1) IDENTIFY THE BINDING CONSTRAINT

Search and find the binding constraint

- This may be difficult if there is variability in your processes

- Note the constraint is not the activity but the underlying resource
e.g. ‘grilling’ is not a binding constraint, but the employees actually grilling or the machine

2) EXPLOIT THE BINDING CONSTRAINT

Keep constraint operating at maximum capacity

- Determine the optimal product mix

- Eliminate idle time
o Shield constraint from variability
o Have an “inventory buffer” at all times (from the process before the binding constraint)
o Reduce set up
- Provide quality inputs  to ensure the limited output is of high quality
- Perform preventive maintenance ^ (often preventive maintenance occurs when the machine isn’t
operating)

3) SUBORDINATE OTHER ACTIVITIES

The binding constraint should dictate the rate at which all other resources produce i.e. they are subordinated

- Reduces inventory and thus cost of holding those inventory (produced by other activities)
- Other resources will have excess capacity
- Requires changes in performance
measurement system and incentive schemes

4. ELEVATE (OR ELIMINATE) THE CONSTRAINT

Take actions to alleviate or eliminate the constraint

- Outsourcing
- Process or product redesign
- Capital investment (be careful! very high cost and permanent)
- Other possibilities? E.g. employee cross-training, dynamic shifting of resources

5. REPEAT STEPTS 1-4  CONTINUOUS IMPROVEMENT!!

- Once the binding constraint had been eliminated…

- Go back to step 1 and identify new binding constraints!

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MORE TERMINOLOGY

Drum-buffer-rope:

- Drum: binding constraints sets rhythm or rate of production for organisation

- Buffer: shield constraint from variability by maintaining inventory in front of it
- Rope: crucial to communicate what is happening with constraint at all times

Drum, beat and rope ideas are part of subordination

Buffer is part of exploitation

9.5 ISSUES WITH TOC

Assumption:

- Only revenues and direct materials change

- In short-term direct labour and VOH are fixed
- What if this does not hold?

TOC relies on finding the binding constraint

- What if the constraint varies?

- What if the constraint is not internal?

IMPLICATIONS OF TOC

Resource Management: diverting resources to non-binding constraints will not increase throughput

- Short-Term: focus on the binding constraint, identify and exploit it, then subordinate all other
activities
- Long-Term: process improvement should focus on elevating and eliminate the binding constraint

Inventory/Product

- Product mix: dictated by the binding constraint (highest throughput) and should optimise throughput
- Quality: higher quality inputs should be used to ensure the binding constraint isn’t wasted

Performance measures and incentive schemes

- Changing performance measures

- Changing incentive schemes

Other implications:

- Idle time on the constraint is lost throughput

- Excess capacity/idle time will exist on non-binding constraints
- Inventory will naturally build up in front of the constraints  these buffers are necessary to ensure
that there is no idle time on the binding constraint
- Reducing inventories will decrease short-term profits as overheads are not being absorbed into the
assets, but will benefit the organization in the long run