Constraint Management During the Pandemic

Never has the importance of supply chain management been as prominent as during the COVID-19 crisis.

Aston Martin cut total profitability due to supply chain disruptions, and weak demand in China will hurt delivery volumes.

1. Explain the nature of the supply, distribution, or delivery problem.
2. Referencing the 7 key principles of the theory of constraints (p. 223 in our core text), what could be done to identify and manage the constraint to reduce or eliminate the bottleneck?

MANAGING CAPACITY AND THROUGHPUT What It Means Capacity Planning ensures that the organization has the capacity to handle current as well as future customer demand. Long-term capacity planning deals with investments in new facilities, equipment, and staffing levels, in view of economies and diseconomies of scale. Managing throughput is about optimizing how much and how quickly services and products are produced and delivered. This has a direct impact on cash flow and the bottom line. The rate at which the orders turn into cash, or the rate at which the order-to-cash cycle occurs, is highly dependent on the throughput rate. The throughput rate of any organizational, production, or service system is only as fast as the slowest department, process, workstation, or activity. These are bottlenecks that constrain the throughput of the entire system. Why It Matters o Capacity planning drives better decisions on how to meet current and future demand. e Capacity planning allows organizations to answer questions such as \"Do we need to invest in buying additional machines and equipment, have a bigger factory, a larger warehouse, or additional production facilities and service centers?\" Managers throughout the organization must understand how to identify and manage bottlenecks in all types of processes, how to relate the capacity and performance measures of one process to another, and how to use that information to determine the best service or product mix. THE CHALLENGE AND OPPORTUNITY FOR MANAGERS Knowing how to optimize capacity can be a challenge for managers trying to make and deliver what customers need when they need, all without incurring excessive costs. To address this, operational CAPACITY PLANNING Do We Have \"Appropriate\" Capacity? Capacity is defined as \"the maximum rate of output of a process or a system.\" Capacity decisions entail having sufficient facilities and equipment to handle orders. Before making capacity decisions, managers must examine three elements of capacity strategy: 1. Sizing capacity cushions 2. Timing and sizing expansion 3. Linking process capacity and other operating decisions While the organization must ensure that it has the capacity to meet current and future customer demand, too much capacity is expensive and wasteful. Getting the balance right involves determining the optimal capacity cushion. This is the amount of reserve capacity necessary to handle sudden increases in demand or temporary losses of production capacity. It measures the amount by which the average utilization for a resource falls below 100 percent of total capacity. Factors leading to companies adopting large capacity cushions: o Demand is variable, uncertain, or product mix changes e Finished goods inventory cannot be stored o Customer service is important o Capacity comes in large increments e Supply of material or human resources is uncertain Factors leading to companies adopting small capacity cushions: e Unused capacity is expensive e Large cushions hide inefficiencies, absenteeism, and unreliable material supply e Subcontractors are available to handle demand peaks Making Wise Capacity Decisions 'Increasing or decreasing capacity by itself is not as important as ensuring that the entire supply chain, from order entry to delivery, is designed for effectiveness. Capacity Making Wise Capacity Decisions \"Increasing or decreasing capacity by itself is not as important as ensuring that the entire supply chain, from order entry to delivery, is designed for effectiveness. Capacity decisions must be made in light of several long-term issues such as the firm's economies and diseconomies of scale, capacity cushions, timing and sizing strategies, and trade-offs between customer service and capacity utilization.\" Krajewski and Malhotra, p. 179 Knowing when to adjust capacity levels and by how much can be a challenge. There are two basic strategies in deciding on the timing and sizing expansion of capacity: (1) expansionist strategy and (2) wait-and-see strategy. There are several tools presented in our core text (see pp. 188-190) that are used in capacity planning to ensure that organizations have the capacity (such as the correct number of machines and staff) to meet demand. Strayer University. All Rights Reserved. This document contains Strayer University confidential and proprietary information and may not be copied, further distributed, or otherwise disclosed, in whole or in part, without the expressed written permission of Strayer University. JWI 552 Lecture Notes (1216) Page 4 of 8 Capacity decisions should be linked through the organization's processes and supply chains. Capacity cushions, resource flexibility, inventory, and long customer lead times can help counter long-term uncertainty. However, if a change is made in one decision area, the capacity cushion may also need to be changed accordingly. For example, capacity cushions can be lowered when quality yields improve or customers tolerate longer lead times. BOTTLENECKS AND CONSTRAINTS BOTTLENECKS AND CONSTRAINTS It is important to understand the terminology operations managers use so that calculations and discussions about supply chain performance can be clear, consistent, and accurate among stakeholders. Three of the terms that form the foundation of this analysis are: Constraint: anything that limits how a system performs and produces e Capacity: the maximum rate of output of a process or a system + Bottleneck: any resource whose available capacity limits the organization's ability to meet the service or product volume, product mix, or marketplace demands Knowing the terminology and critical performance and capacity measures at the operational level is important. So is knowing how these apply to the financial measures at the enterprise level. Four of the most useful metrics are summarized below. * [nventory (l): all money invested in a system to purchase stock the company intends to sell. A decrease in | leads to an increase in net profit. e Throughput (T): the rate at which a system generates money through sales. An increase in T also leads to an increase in net profit. e Operating Expenses (OE): the money a system uses to turn inventory into throughput. A decrease in OE leads to an increase in net profit. e Utilization (U): how much equipment, space, or labor is currently being used. An increase in U at the bottleneck leads to an increase in net profit. For more details, refer to table 6.1 on page 223 of our text. If the throughput rate is lower than the customer demand rate (or takt rate), the need for costly finished goods inventory arises. Longer lead times, stockouts, and backorders may result. You may even lose customers. If the throughput rate is higher than customer demand rate, then there is a build-up of finished goods inventory. This can result in excessive cash being tied up in inventory and warehousing costs. Five Steps for the Application of TOC There are five steps that all operations managers must understand and leverage to maximize the impact of TOC (see pp. 223-224): Step 1: Identify the system bottleneck(s) Step 2: Exploit the bottleneck(s). Create schedules that maximize throughput of the bottleneck(s). Step 3: Subordinate all other decisions to step 2. Non-bottleneck resources should be scheduled to support the schedule of the bottleneck and not produce more than it can handle. Step 4: Elevate the bottleneck(s). Consider increasing capacity at the bottleneck(s). Step 5: Do not let inertia set in. System constraints may shift as improvements are made. Taken together, these 7 key principles and 5 steps provide important guidelines to help operators make meaningful improvements in supply chain performance. Strayer University. All Rights Reserved. This document contains Strayer University confidential and proprietary information and may not be copied, further distributed, or otherwise disclosed, in whole or in part, without the expressed written permission of Strayer University. JWI 552 Lecture Notes (1216) Page 6 of 8 SUCCEEDING BEYOND THE COURSE As you read the materials and participate in class activities, stay focused on the key learning outcomes e N S - i e