Profit Optimization Through the Application of Theory of Constraints (TOC): A Case Study in Printing Company

Globalization has made industrial competition to become intensified and more stringent. As technology advances, traditional management is deemed insufficient to meet the needs of many companies in order to achieve their goals. The theory of constraints is considered to be a pertinent method to overcome the faced challenges. The theory is aimed to effectively manage constraints that prevent companies from achieving their goals. It is focused on enhancing system capacity constraints and minimizing inventory and operating costs to increase the profit by managing company’s resources efficiently. The purpose of this study is to apply the theory on a case study in a printing company to manage obstacles in an effective way by defining constraints that prevent the company from achieving its targets. Thus, it can increase the company’s profitability. Results show that there are capacity constraints on glue and laminating machine causing the company to solely produce 72.06% of the total demand. It is suggested that if the company adds one more laminating glue machine, an increasing profit as much as 22.33 % can be attained.


Introduction
Limitation of resources to produce products in order to meet market demands is considered to be a constraint that may prevent many companies from achieving their targets. The theory of constraints (TOC) is considered to be a pertinent approach to help companies to improve their performances and efficiency [1].
TOC is very suitable to handle production capacity constraints by identifying bottlenecks and increasing capacity on the identified bottleneck system. Thus, it may benefit companies to increase their profits [2].
According to the theory, company's performance can be measured through three parameters, namely throughput, inventory, and operating costs [3]. Throughput is the rate of product being produced per unit of time. Throughput rate is inversely proportional to the cost associated with raw materials and supplies. When the throughput increases, the cost associated with raw materials and supplies will decrease. This could happen due to the throughput is obtained from the reduction of selling price and materials and supplies cost [2]. Inventory cost is the total of production and labor costs [2]. Whereas operating cost is cost expended to undertake production activities apart from material costs [2].
 The main objective of a company is to make profit: If the company is assumed as a chain, the strongest chain is the weakest child chain. From this point of view, the weakest child chain need be found and strengthened.  Direct labor cost is considered as a part of operating cost: according to the theory, all costs are associated with the operational cost unless the direct materials and inventory costs. Profitability is measured by calculating the selling price, number of sales and direct materials cost and inventory costs. In addition, direct labor costs and manufacturing overhead costs are defined as fixed costs.  There are external and internal factors that prevent the company from making a profit. It is easy to identify capacity constraints because it generally occurs in the production process.  Planning the production flow is a difficult task since constraints/bottlenecks must be defined and changes in products, and product mixes must be considered.
The Theory of Constraint (TOC) has 3 focus parameters namely throughput (outcome), stock (raw material costs), and operating costs [3]. The following is an explanation of these parameters.
 Throughput (Outcome) is found from the results of a reduction between the selling price of the product and the cost of raw materials. Contribution margins are found by reducing all variable costs (direct raw materials and inventory costs, direct labor costs, variable parts of overhead costs) from the selling price. Contribution of margin and throughput are different although seems similar. Louderback & Patterson (1996) says that throughput is found by reducing the cost of direct raw materials and inventory costs from the selling price. Because only variable costs contain direct raw material costs and inventory costs in the TOC (Okutmus et al., 2015). Okutmus et al., (2015) said that output or throughput is a measure found by reducing raw material costs and inventory costs from the selling price of the product (Tiryakigil, 2011)  Stock or Inventory is defined as money invested for producing a product, which is the total of production cost and labor cost [2].  Operating cost is defined as the cost expended regarding the running of business's core operations. Operation costs includes all production costs except the cost associated with raw materials [2]. The application of TOC consists of 5 steps as know 5FS:  Identifying the constraints  Exploiting the constraints effectively  Subordinating every related decision to the constraints  Elevating the constraints  Repeat the process

Company's Information
This research took place in a local printing company, in Jakarta, Indonesia. The company applies 7 hours of work on Monday to Friday, and 5 hours of work for Saturday. The company recently has a bottleneck problem within its production system. It has 5 work centers, i.e. cutting, printing, ponding, varnishing, and laminating. All work centers have the same time capacity every month. During May 2018 there were 576,000 seconds time capacity. Additionally, the total demands on May 2018 were 136,000 unit, and there were 27 types of product had different demand quantities.
The company produces a product, which consists of two parts, namely the top and bottom. The upper part passes through all work stations except the vertical engine. Varnishing machines are used to varnish the bottom part. After the upper part is finished on the glue and laminating machine, the product will return to the ponding machine for finishing the ponding process. Then it will be cleaned and packed with the bottom. While the bottom does not pass through the process in the printing machine and glue & laminating machine.

TOC Running
3.2.1. Constraint Identification. The first step of the TOC is to identify constraints. Identification is done by comparing the theoretical capacity and the actual capacity. Theoretical capacity is the available capacity of active working time. While the actual capacity is the capacity of active work time that is actually needed. If actual capacity exceeds the theoretical capacity, then constraints will occur. The following table shows the comparison between theoretical capacity and actual capacity of each machine. As an example the product A2 works in a cutting station with a capacity of 200 sheets/second or 0.15 seconds/sheet. The request of A2 product is 5,000 units. So that at the cutting work station, the actual capacity is 0.15 x 5,000 = 750 seconds. At A2 print work station requires actual capacity of 1 x 5,000 = 5,000 seconds. The ponding work station requires actual capacity of 4 x 5,000 = 20,000 seconds. Whereas glue & laminating work stations require actual capacity of 12 x 5,000 = 60,000. The calculation is carried out on all products so that the actual capacity required by each work station will be obtained. After that, a comparison is made between the actual capacity and the theoretical capacity. For example, the actual working capacity of glue and laminating stations is 1,032,000 seconds. This exceeds the existing theoretical capacity of 576,000 seconds. So there is a difference of 456,000 seconds. In other words, the glue & laminating machine is jammed. This is called a constraint (bottleneck). The source of these constraints is called capacity constraints.

Exploiting the Constraints Effectively.
At this stage, the throughput rate is calculated by subtracting the raw materials and supplies costs with the selling price of product [2]. Table 2 below shows the throughput rate calculation for each product. Then calculate the constraint rate per product based on the time limit on the work stations which exhibit the bottleneck (glue & laminating). Table 3 shows the constraint rate of the product based on the time constraint. Based on the table above, product B12 have the highest constraint rate. So that the product is prioritized to produce. The next priority sequence is sorted by the value of the constraint rate from the highest to the lowest.
Based on table 3 it can be seen that from 18 types of the bottleneck product, only 12 types can be produced. And A4 products can be produced as many as 500 units of the total 5,000 unit requests. This happens due to the insufficient production time capacity which causes the company fail to meet all customer demands [2]. The next step is calculating the profit based constraints. Table 4 below shows the company's attainable profit. Total selling is obtained by multiplying the selling price with demand. Total raw material cost is obtained by multiplying the raw material cost with demand. Total running expenses are obtained by multiplying running expenses with demand.

Subordinate Every Related Decision to The
Constraints. This research will provide three possible decision alternatives, namely adding one more of both glue & laminating machines, implementing an outsourcing for the remaining products that cannot be done to other companies, and holding overtime hours. In addition, special shifts can also be made. However, it is difficult to do so due to the difficulty of finding labors to work for the additional shift and it would expend very large operational costs.