Theory of Constraints (TOC)
The Theory of Constraints (TOC) is a suite of management concepts developed by Dr. Eliyahu Goldratt as introduced in the landmark book "The Goal." It helps managers decide:
- What to change?
- What to change it to?
- How to cause the change?
Despite it's name, the "Theory of Constraints" is not particularly theoretical. Rather, it helps find practical, effective solutions to business problems.
TOC systematically focus efforts, energy and attention on the "system constraint." This constraint, or bottleneck, restricts the output of the entire system and at the same time represents the primary leverage point for improving it. Simply put, TOC means identifying constraints and managing them, resulting in:
To accomplish this, 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 systematically focus efforts, energy and attention on the "system constraint." This constraint, or bottleneck, restricts the output of the entire system and at the same time represents the primary leverage point for improving it. Simply put, TOC means identifying constraints and managing them, resulting in:
- On-Time In-Full (OTIF) delivery to customers
- Elimination of stock-outs across the supply chain
- Better control over operations and far less firefighting
- Reduced cycle times and therefore inventories
- Rapid response culture and fewer chronic conflicts between team members
- Exposing additional production capacity without any investment
- Higher Net Profit, ROCE & Free Cash Flow
To accomplish this, 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.
Constraints are the Key to Unlocking Performance
Like the weakest link in a chain, every system must have a bottleneck or "CONSTRAINT" which governs it's output. We know this because no system has infinite output ... if you check the financial results of a company, you will never observe infinite profits! A particular type of machine, employee, or even shelf space might serve as the constraint. So could supplies, orders, or cash.
Constraints restrict output whether we acknowledge them 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 large amounts of 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 manage it well.
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
Recommended Reading: Theory of Constraints
- The Goal (Goldratt) - the business novel that started it all, a gripping read
- Velocity: Combining Lean, Six Sigma and Theory of Constraints to Achieve Breakthrough Performance (Jacob, Bergland, Cox) - modern alternative to The Goal, more up-to-date and clear on certain points
- The Choice (Goldratt) - a father shares his reflections on how to live a full life with his daughter
- Viable Vision: Transforming Total Sales into Net Profits (Kendall) - brief yet thorough introduction to all application area of TOC. Great Executive Summary
Photo Attribution (clip): http://www.flickr.com/photos/kylemacdonald/66016576/sizes/o/
