Theory of Constraints (TOC) of Dr. Eliyahu Goldratt
The Theory of Constraints is a process improvement methodology that emphasizes the importance of identifying the "system constraint" or bottleneck. By leveraging this constraint, organizations can achieve their financial goals while delivering on-time-in-full (OTIF) to customers, avoiding stock-outs in the supply chain, reducing lead time, etc.
Other common benefits of implementing the Theory of Constraints include better control over operations, less inventory, reduced conflicts between team member and drastically reduced firefighting. Often, additional capacity gets exposed without further capital investment or hiring additional workers.
Other common benefits of implementing the Theory of Constraints include better control over operations, less inventory, reduced conflicts between team member and drastically reduced firefighting. Often, additional capacity gets exposed without further capital investment or hiring additional workers.
|
The Core Idea – Every system has a limiting factor or constraint. Focusing improvement efforts to better utilize this constraint is normally the fastest and most effective way to improve profitability.
|
Constraints - The Chain Analogy
No chain can ever be stronger than it's weakest link. Similarly, every system must have a constraint that limits it's output. We know this because no system has infinite output... for example, you will never find any company with infinite sales or profit!
Note that every chain will have ONE (and only one) weakest link. Strengthening the other links can never increase the overall strength of the chain, because they are not the weakest. In fact, strengthening a non-weakest link will probably DECREASE the overall strength of the chain due to the added weight:
Similarly, attempts to optimize each individual process and function tend to ignore the impact on the constraint, thereby causing a variety of unforeseen problems that reduce the overall performance and effectiveness of the organization. For example, if sales orders are the constraint, optimizing production output can result in overproduction. Such large quantities of excess finished goods inventory will in turn incur hefty carrying charges and cost of capital. A resulting cash crunch might also delay payments to vendors, thereby triggering supply problems which delay orders, tarnish the reputation with customers and reduce future sales.
What if we made efforts to utilize the weakest link more fully? We could exploit it more by minimizing idle time of the chain, or subordinate everything else to it by avoiding sudden jerks that add additional stress when it is fully loaded. Once we have mastered how to utilize the chain well, we might begin searching for ways of strengthening the weakest link itself. Even a small increase in the strength of the weakest link could have a rather large impact on the overall strength of the chain:
A constraint limits the output of every system, whether we acknowledge it or not. When properly identified and managed, constraints provide the fastest route to significant improvement and form the bedrock for continuous growth. When ignored, the constraint may lie idle, squandering system capacity. An out-of-control constraint may also wreck havoc on delivery schedules and cause unpredictable delays. It is therefore crucial for any manager to make the most of their constraint and learn to manage it well.
TOC shifts the focus of management from optimizing separate assets, functions and resources to increasing the flow of throughput generated by the entire system. TOC's key processes are focused on removing barriers that prevent each part from working together as an integrated whole.
TOC shifts the focus of management from optimizing separate assets, functions and resources to increasing the flow of throughput generated by the entire system. TOC's key processes are focused on removing barriers that prevent each part from working together as an integrated whole.
Knowledge Check
Many people overestimate their grasp of the Theory of Constraints. Take a moment to check your understanding so far.
Imagine you are responsible for managing the below process flow. Each letter represents a different sub-process such as sales, design, operations stage 1, operations stage 2, customer invoicing, payment collection, etc. Take a moment to visualize a simple sequential process that you are familiar with, perhaps in manufacturing or services, or even a government process such as issuing driver's licenses.
Imagine you are responsible for managing the below process flow. Each letter represents a different sub-process such as sales, design, operations stage 1, operations stage 2, customer invoicing, payment collection, etc. Take a moment to visualize a simple sequential process that you are familiar with, perhaps in manufacturing or services, or even a government process such as issuing driver's licenses.
You are given the above report detailing the overall efficiency of each sub-process.
- Where will you FOCUS most of your attention?
- Where will you avoid putting ANY attention?
Which sub-process did you choose...?
Did you have any questions or information that you felt might be missing?
Did you have any questions or information that you felt might be missing?
Just after you decided where to focus your attention, you receive a report containing the maximum capacity of each sub-process:
Substitute any measurement of capacity that suits your chosen process. For example, tons per hour.
- Were you focusing in the right place? Most people focus on Process B, even though process D is actually the constraint
- What are the necessary consequences if you focus primarily on optimizing process B?
- The efficiency report remains equally accurate before and after receiving the capacity report. What changed?
- What would you expect the maximum possible output from such a system to be?
What is the Theory of Constraints?
The Theory of Constraints (TOC) as developed by Dr. Eliyahu Goldratt was introduced in his landmark book "The Goal." Over the years, TOC has come to encompass a wide variety of different concepts:
- The Five Focusing Steps – the original expression of TOC which will be explained in detail in this article
- Throughput Accounting – a robust method of measuring operations which removes certain problematic distortions in financial accounting practices to accurately measure progress towards the goal and facilitate better decision-making
- TOC Thinking Processes & Philosophy – a set of problem solving tools and assumptions for developing breakthroughs across a wide variety of situations and environments. They help decide:
- What to change?
- What to change to?
- How to cause the change?
- TOC Applications – highly evolved strategies and tactics that apply to specific industries or environments such as S-DBR for make-to-order discreet manufacturing, hospital management, rapid replenishment for distribution & retail, and Critical Chain for project environments. These methodologies, developed using the TOC thinking processes, are beyond the scope of this article but will be references with links at appropriate places so that you can learn more.
Delivering Extraordinary Performance Improvements
Implementing the Theory of Constraints has yielded remarkable results for companies around the world. An independent study discovered that companies achieved the following impact (on average):
These results were observed across various geographies and industries. In many cases, they represent a partial implementation of TOC tools, leaving us to wonder what sort of impact might have been possible using the the full set of applications.
Constraint Theory Works for Services Also
The overwhelming popularity of Dr. Goldratt’s bestselling business novel “The Goal” (set in a manufacturing company) has led some to believe that the Theory of Constraints applies primarily to the manufacturing environment.
Although initially developed in response to specific challenges in this sector, other TOC applications have been developed for a wide variety of industries using the TOC Thinking Processes. These are successfully implemented in sectors like Heavy Capital Equipment, Retail, Banking, FMCG, Logistics, Job Shops, Mining, Healthcare, etc. TOC has also been applied in Not-for-Profits including primary education, organized religion, the military, the judicial system and others with equally impressive results.
Although initially developed in response to specific challenges in this sector, other TOC applications have been developed for a wide variety of industries using the TOC Thinking Processes. These are successfully implemented in sectors like Heavy Capital Equipment, Retail, Banking, FMCG, Logistics, Job Shops, Mining, Healthcare, etc. TOC has also been applied in Not-for-Profits including primary education, organized religion, the military, the judicial system and others with equally impressive results.
Overview of TOC Applications
Eli Goldratt developed specific applications or tools to assist in specfic industry situations:
- Availability in Supply & Distribution: Reliable Rapid Replenishment
- Availability in Finished Goods: Simplified Drum-Buffer-Rope (S-DBR) for make-to-stock of make-to-availability
- On-Time Production: Simplified Drum-Buffer-Rope (S-DBR) for make-to-order
- On-Time Assembly: Full Kit
- On-time Projects: Critical-Chain Project Management
- Turnaround of Sick Units: Evaporating Cash Constraint
- Increasing Customer Demand: Un-Desirable Effect, Unrefusable "Mafia Offer"
- Reducing Demand Risk: Customer Segmentation
- Causing Change: 6 Layers of Resistance/Buy-In
- Sound Financial Decision-Making: Operational measurements T/I/OE
Learn More
Dr. Goldratt's business novel The Goal is the original classic that started the TOC movement, and serves a good starting point for anyone interested to explore the field, especially those from the traditional manufacturing sector.
The following list of resources is carefully curated to help you zero in on some of the best ways to learn more on each given topic below:
Surveys of the TOC Landscape
The following list of resources is carefully curated to help you zero in on some of the best ways to learn more on each given topic below:
Surveys of the TOC Landscape
- Viable Vision (book by Gerald Kendall) - a concise, broad-based introduction to all of the major TOC applications summarizing the entire TOC body of Knowledge
- Goldratt Satellite Program (video series by Eliyahu M. Goldratt) – perhaps the most intense yet delightful way to cover the TOC fundamentals in a fiery style that only Eli himself can pull off. Separate DVDs covering 1. Operations - DBR and Buffer Management 2. Finance and Measurements - T, I & OE and Throughput Accounting 3. Project Management and Engineering - Critical Chain and Product Development 4. Distribution and Supply Chain - Pull System and Replenishment 5. Marketing - Unrefusable Offers and Market Segmentation 6. Sales and Buy-in - Overcoming Resistance and Handling Reservations 7. Managing People - Communication and Team Building 8. Strategy and Tactics - Immunizing the Future of Your Company
- Theory of Constraints Handbook - a compilation of up-to-date articles covering a wide range of topics authored by leading TOC experts in each respective area.
- Production the TOC Way with Simulator (book by Eliyahu M. Goldratt) - elaborates the TOC production solution and also includes a MS Windows simulator for gaining first-hand experience managing different types of operations.
- Critical Chain (book by Eliyahu M. Goldratt) - Chapters 11, 12, and 15 contain a summary of what the character in this book learned while doing a year-long sabbatical at UniCo – the company featured in “The Goal.”
- Supply Chain Management at Warp Speed (book by Eli Schragenheim, H William Dettmer and J Wayne Patterson) - a conceptual explanation of many of the latest developments including plenty of formulas, details and diagrams.
- It’s Not Luck titled "The Goal 2" in certain countries (book by Eliyahu M. Goldratt) - this business novel explains the essence of the TOC replenishment solution through the "I Cosmetics" example
- Necessary but Not Sufficient (book by Eliyahu M. Goldratt, Eli Schragenheim & Carol A. Ptak) - Chapters 16 & 17 nicely summarize the problem and the solution
- Isn't it Obvious (book by Eliyahu M. Goldratt) - this business novel set in the retail sector explains the replenishment solution from a retail perspective
- The Choice, Revised Edition (book by Eliyahu M. Goldratt and Efrat Goldratt-Ashlag) – this compelling dialog between father and daughter includes a detailed solution tailored for the fashion industry
- Supply Chain Management at Warp Speed (book by Eli Schragenheim, H William Dettmer and J Wayne Patterson) - this conceptual explanation of many of the latest developments includes plenty of formulas, details and diagrams.
- It’s Not Luck titled "The Goal 2" in certain countries (book by Eliyahu M. Goldratt) - this business novel demonstrates 3 different methods of growing sales and how they are arrived upon.
- Mafia Offers: Dealing with a Market Constraint (chapter by Lisa Lang in the Theory of Constraints Handbook) - this article summarizes what a mafia offer is and how to construct one including illustrative examples
- The Machine (book byJustin Roff-Marsh) – a TOC-based approach to the design of an effective and efficient sales function
- The Cash Machine (book by Richard Klapholz & Alex Klarman) - this business novel illustrates the Theory of Constraints approach for sales management
- Critical Chain (book by Eliyahu M. Goldratt) - this business novel illustrates the TOC approach for on-time within-budget projects for the multi-project environment.
- Lean Project Management (book by Lawrence P. Leach) - a quick and practical guide explains the nuts & bolts of implementing CCPM and lean for project management.
- Project Management in the Fast Lane (book by Robert C. Newbold) - an advanced explanation of CCPM including many of the finer nuances
- The Haystack Syndrome (book by Eliyahu M. Goldratt) - How can you sift information out of the ocean of data? This book offers a detailed description of the logic underpinning sound management information systems so as to offer a clear picture of what is really going on in a business.
- The Measurement Nightmare (book by Debra Smith) - explains how to interpret financial accounting numbers (created to adhere to government standards like GAAP and tax compliance) for taking better business decisions.
- Necessary but Not Sufficient (book by Eliyahu M. Goldratt, Eli Schragenheim & Carol A. Ptak) - this business novel develops a step by step framework to get the most out of technological breakthroughs.
- It’s Not Luck titled "The Goal 2" in certain countries (book by Eliyahu M. Goldratt) - this business novel demonstrates the TOC Thinking Processes being applied across a three different business environments facing diverse challenges to arrive at unique and powerful strategies for success.
- The Choice, Revised Edition (book by Eliyahu M. Goldratt and Efrat Goldratt-Ashlag) – this compelling dialog between father and daughter exposes the core ssumptions and philosophical underpinnings behind TOC, and their practical usefulness across wide-ranging personal and professional situations.
- Thinking for a Change (book by Lisa J. Scheinkopf) – a readable, step-by-step guide to the TOC Thinking Processes including evaporating clouds, current reality trees, future reality trees, prerequisite trees, transition trees, etc.
- TOCICO is an international industry association responsible for certification of TOC consultants and practitioners. They also conduct webinars and hold annual conferences for showcasing implementation case studies and sharing advances in the TOC body of knowledge.
Photo Attribution (clip): http://www.flickr.com/photos/kylemacdonald/66016576/sizes/o/
