The Theory of Constraints is a methodology for identifying the most important limiting factor (i.e., constraint) that stands in the way of achieving a goal and then systematically improving that constraint until it is no longer the limiting factor. In manufacturing, the constraint is often referred to as a bottleneck.
The Theory of Constraints takes a scientific approach to improvement. It hypothesizes that every complex system, including manufacturing processes, consists of multiple linked activities, one of which acts as a constraint upon the entire system (i.e., the constraint activity is the “weakest link in the chain”).
So what is the ultimate goal of most manufacturing companies? To make a profit – both in the short term and in the long term. The Theory of Constraints provides a powerful set of tools for helping to achieve that goal, including:
Dr. Eliyahu Goldratt conceived the Theory of Constraints (TOC), and introduced it to a wide audience through his bestselling 1984 novel, “The Goal”. Since then, TOC has continued to evolve and develop, and today it is a significant factor within the world of management best practices.
One of the appealing characteristics of the Theory of Constraints is that it inherently prioritizes improvement activities. The top priority is always the current constraint. In environments where there is an urgent need to improve, TOC offers a highly focused methodology for creating rapid improvement.
A successful Theory of Constraints implementation will have the following benefits:
The core concept of the Theory of Constraints is that every process has a single constraint and that total process throughput can only be improved when the constraint is improved. A very important corollary to this is that spending time optimizing non-constraints will not provide significant benefits; only improvements to the constraint will further the goal (achieving more profit).
Thus, TOC seeks to provide precise and sustained focus on improving the current constraint until it no longer limits throughput, at which point the focus moves to the next constraint. The underlying power of TOC flows from its ability to generate a tremendously strong focus towards a single goal (profit) and to removing the principal impediment (the constraint) to achieving more of that goal. In fact, Goldratt considers focus to be the essence of TOC.
The Theory of Constraints provides a specific methodology for identifying and eliminating constraints, referred to as the Five Focusing Steps. As shown in the following diagram, it is a cyclical process.
The Five Focusing Steps are further described in the following table.
Step | Objective |
---|---|
Identify | Identify the current constraint (the single part of the process that limits the rate at which the goal is achieved). |
Exploit | Make quick improvements to the throughput of the constraint using existing resources (i.e., make the most of what you have). |
Subordinate | Review all other activities in the process to ensure that they are aligned with and truly support the needs of the constraint. |
Elevate | If the constraint still exists (i.e., it has not moved), consider what further actions can be taken to eliminate it from being the constraint. Normally, actions are continued at this step until the constraint has been “broken” (until it has moved somewhere else). In some cases, capital investment may be required. |
Repeat | The Five Focusing Steps are a continuous improvement cycle. Therefore, once a constraint is resolved the next constraint should immediately be addressed. This step is a reminder to never become complacent – aggressively improve the current constraint…and then immediately move on to the next constraint. |
The Theory of Constraints includes a sophisticated problem solving methodology called the Thinking Processes. The Thinking Processes are optimized for complex systems with many interdependencies (e.g., manufacturing lines). They are designed as scientific “cause and effect” tools, which strive to first identify the root causes of undesirable effects (referred to as UDEs), and then remove the UDEs without creating new ones.
The Thinking Processes are used to answer the following three questions, which are essential to TOC:
Examples of tools that have been formalized as part of the Thinking Processes include:
Tool | Role | Description |
---|---|---|
Current Reality Tree | Documents the current state. | Diagram that shows the current state, which is unsatisfactory and needs improvement. When creating the diagram, UDEs (symptoms of the problem) are identified and traced back to their root cause (the underlying problem). |
Evaporating Cloud Tree | Evaluates potential improvements. | Diagram that helps to identify specific changes (called injections) that eliminate UDEs. It is particularly useful for resolving conflicts between different approaches to solving a problem. It is used as part of the process for progressing from the Current Reality Tree to the Future Reality Tree. |
Future Reality Tree | Documents the future state. | Diagram that shows the future state, which reflects the results of injecting changes into the system that are designed to eliminate UDEs. |
Strategy and Tactics Tree | Provides an action plan for improvement. | Diagram that shows an implementation plan for achieving the future state. Creates a logical structure that organizes knowledge and derives tactics from strategy. Note: this tool is intended to replace the formerly used Prerequisite Tree in the Thinking Processes. |
Throughput Accounting is an alternative accounting methodology that attempts to eliminate harmful distortions introduced from traditional accounting practices – distortions that promote behaviors contrary to the goal of increasing profit in the long term.
In traditional accounting, inventory is an asset (in theory, it can be converted to cash by selling it). This often drives undesirable behavior at companies – manufacturing items that are not truly needed. Accumulating inventory inflates assets and generates a “paper profit” based on inventory that may or may not ever be sold (e.g., due to obsolescence) and that incurs cost as it sits in storage. The Theory of Constraints, on the other hand, considers inventory to be a liability – inventory ties up cash that could be used more productively elsewhere.
“The Theory of Constraints, on the other hand, considers inventory to be a liability – inventory ties up cash that could be used more productively elsewhere.In traditional accounting, there is also a very strong emphasis on cutting expenses. The Theory of Constraints, on the other hand, considers cutting expenses to be of much less importance than increasing throughput. Cutting expenses is limited by reaching zero expenses, whereas increasing throughput has no such limitations.
These and other conflicts result in the Theory of Constraints emphasizing Throughput Accounting, which uses as its core measures: Throughput, Investment, and Operating Expense.
Core Measures | Definition |
---|---|
Throughput | The rate at which customer sales are generated less truly variable costs (typically raw materials, sales commissions, and freight). Labor is not considered a truly variable cost unless pay is 100% tied to pieces produced. |
Investment | Money that is tied up in physical things: product inventory, machinery and equipment, real estate, etc. Formerly referred to in TOC as Inventory. |
Operating Expense | Money spent to create throughput, other than truly variable costs (e.g., payroll, utilities, taxes, etc.). The cost of maintaining a given level of capacity. |
In addition, Throughput Accounting has four key derived measures: Net Profit, Return on Investment, Productivity, and Investment Turns.
Net Profit = Throughput − Operating Expenses
Return on Investment = Net Profit / Investment
Productivity = Throughput / Operating Expenses
Investment Turns = Throughput / Investment
In general, management decisions are guided by their effect on achieving the following improvements (in order of priority):
The strongest emphasis (by far) is on increasing Throughput. In essence, TOC is saying to focus less on cutting expenses (Investment and Operating Expenses) and focus more on building sales (Throughput).
Drum-Buffer-Rope (DBR) is a method of synchronizing production to the constraint while minimizing inventory and work-in-process.
The “Drum” is the constraint. The speed at which the constraint runs sets the “beat” for the process and determines total throughput.
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