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Decision Making Strategy: Goldratt's Theory of Constraints

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Task - Answer the following.

Your Supply Chain Manager thinks that theories taught in The Goal by Eliayhu Goldratt may have direct applicability to your company and the decisions being made.

Your Supply Chain Manager is probably your most knowledgeable subordinate and is the leading candidate to replace you someday. Because you want to "stay a step ahead" of him, you decide to study the area, so you go to the Internet and begin research.

Read about key elements and applications of Goldratt's Theory of Constraints. Post, with explanation, at least three elements that you found most important and applicable to the company.

Company Information
You are the Operations Manager for a $50,000,000 (sales) subsidiary of a $750,000,000 corporation. You report to the Divisional Vice President. Your division produces industrial products that are used in the construction, maintenance, transportation, and equipment manufacturing industries. The other two divisions in your corporation serve the automotive and electronics industries. A few products are cross-marketed.

Your division is currently number three in your market place. The number one firm has about 60% of the market, the number two firm has about 25% of the market, and you have about 15% of the market.

Your products are often used in human safety applications, so product quality is paramount. Neither you nor your competitors have a competitive quality advantage, nor a distinct production cost advantage. Being number three in the market place has meant that your division must excel in customer service and delivery reliability.

Over 90% of your sales come through manufacturing representatives to regional distributors who hold inventory of your most popular products in limited quantities. To keep your distributors loyal, your company works very hard on customer service.

Your division currently has about 4,000 products in your catalog. About 1,200 items are "in-stock" (MTS, Make-to-Stock) items. The remaining 2,800 items are "non-stock" items that can be considered to be Make-To-Order (MTO). The MTO items are not stocked but are manufactured if, and only if, an order for them is received.

Your division promises to ship all "in-stock" items within 24 hours of receiving the order. If the order is received by noon, the order is shipped that day. Because most of your orders are small and are delivered to diverse addresses, UPS is the preferred shipping mode.

In contrast, your two sister divisions operate on a much longer lead-time and ship in comparatively larger quantities. They tend to operate much more in the MTO mode and do not offer the fast 24-hour shipping responses that your division does.
The corporate headquarters are in St. Louis, Missouri, where the company was founded in the 1910s. You are located in Cape Girardeau, Missouri, where manufacturing operations were moved in the 1950s to exploit the lower labor costs. The corporate North American Warehouse (NAW) is located in a western suburb of St. Louis to be near the St. Louis airport. Virtually all shipments to customers are made from the NAW. Several years ago, to stay competitive, production operations started to shift from the Cape Girardeau location to a plant in Mexico. The shift to Mexico has been successful overall, but the plant does not always deliver what is needed and is sometimes late in delivering parts to the NAW.

The corporation installed SAP several years ago. You have been far too busy to thoroughly investigate all of the details, but everyone in the organization seems to be satisfied at some level with the system.

Because you are the STO (Senior Technical Officer) of your division, you also manage the client support group (located near the St. Louis airport) which consults with clients on product purchases and offers consulting/project management services for product installation of your products. Your direct reports include the Plant Manager in Cape Girardeau, the Plant Manager in Mexico, the Divisional Supply Chain Manager, the Manager of Product Quality Control, and the Divisional Customer Support Manager. Your chief peers are the Director of Marketing and the Manager of the Divisional Headquarters staff. Order entry reports to the Director of Marketing. Purchasing, Accounting, Finance, HR, and IT functions are handled at the corporate level. The manager of the NAW formally reports to the VP of the automotive division, but he is tasked to serve all three divisions equitably.

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Solution Preview

According to Goldratt's theory, we must first identify our system constraints. There are two main types of constraints. These are physical and policy constraints. Our physical constraints are time, stock capacity and quality. Other constraints are purchasing policy constraints of our distributors. Our time constraint is created by the location of our plant in Mexico and our promise to ship all "in-stock" items within 24 hours of receiving the order. Distance makes it difficult to deliver what is needed to the NAW on time. Because most of the items in our product catalogue are non-stock items and manufactured according to the orders, it can be also difficult to manufacture them in a short time with the desired quality that can satisfy these distributors.

Our next step is to determine how to manage and exploit these constraints. We should reduce our lead time and inventory while increasing our profits. We can build different facilities, create job shops and flow shops in order to optimize the time in our manufacturing operations. For example ...

Solution Summary

This step-by-step solution discusses identifyin system constraints, determining how to manage and exploit these constraints, dedicated flow shops and external constraints in 650 words.

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