Theory of constraints

Theory of Constraints (TOC) is an overall management philosophy introduced by Dr. Eliyahu M. Goldratt in his 1984 book titled The Goal, that is geared to help organizations continually achieve their goal. The title comes from the contention that any manageable system is limited in achieving more of its goal by a very small number of constraints, and that there is always at least one constraint. The TOC process seeks to identify the constraint and restructure the rest of the organization around it, through the use of the Five Focusing Steps.

Basics

Key assumption

The underlying assumption of Theory of Constraints is that organizations can be measured and controlled by variations on three measures: throughput, operating expense, and inventory. Throughput is money (or goal units) generated through sales. Operating expense is money that goes into the system to ensure its operation on an ongoing basis. Inventory is money the system invests in order to sell its goods and services.

The five focusing steps

Theory of Constraints is based on the premise that the rate of goal achievement is limited by at least one constraining process. Only by increasing flow through the constraint can overall throughput be increased.

Assuming the goal of the organization has been articulated (e.g., "Make money now and in the future") the steps are:

1. Identify the constraint (the resource or policy that prevents the organization from obtaining more of the goal)
2. Decide how to exploit the constraint (make sure the constraint's time is not wasted doing things that it should not do)
3. Subordinate all other processes to above decision (align the whole system or organization to support the decision made above)
4. Elevate the constraint (if required or possible, permanently increase capacity of the constraint; "buy more")
5. If, as a result of these steps, the constraint has moved, return to Step 1. Don't let inertia become the constraint.

The five focusing steps aim to ensure ongoing improvement efforts are centered around the organization's constraints. In the TOC literature, this is referred to as the "Process of Ongoing Improvement" (POOGI).

These focusing steps are the key steps to developing the specific applications mentioned below.

Constraints

A constraint is anything that prevents the system from achieving more of its goal. There are many ways that constraints can show up, but a core principle within TOC is that there are not tens or hundreds of constraints. There is at least one and at most a few in any given system. Constraints can be internal or external to the system. An internal constraint is in evidence when the market demands more from the system than it can deliver. If this is the case, then the focus of the organization should be on discovering that constraint and following the five focusing steps to open it up (and potentially remove it). An external constraint exists when the system can produce more than the market will bear. If this is the case, then the organization should focus on mechanisms to create more demand for its products or services.

Types of (internal) constraints

• Equipment: The way equipment is currently used limits the ability of the system to produce more salable goods / services.
• People: Lack of skilled people limits the system.
• Policy: A written or unwritten policy prevents the system from making more.

The concept of the constraint in Theory of Constraints differs from the constraint that shows up in mathematical optimization. In TOC, the constraint is used as a focusing mechanism for management of the system. In optimization, the constraint is written into the mathematical expressions to limit the scope of the solution (X can be no greater than 5).

Please note: Organizations have many problems with equipment, people, policies, etc. But the constraint is the thing that is preventing the organization from getting more Throughput (typically, sales).

Buffers

Buffers are used throughout Theory of Constraints. They appear as part of the EXPLOIT and SUBORDINATE steps of the five focusing steps. Buffers are placed before the key constraint, thus ensuring that the constraint is never starved. Buffers used in this way protect the constraint and should allow for normal variation of processing time and the occasional upset (Murphy) before the constraint.

Buffers can be a bank of physical objects before a work center, waiting to be processed by that work center. Buffers can also be represented by time, as in the time before work reaches the constraint. There should always be enough (but not excessive) work in the time queue before the constraint.

Buffers are not the small queue of work that sits before every work center in a Kanban system. The assumption in Theory of Constraints is that with one constraint in the system, all other parts of the system have sufficient capacity to keep up with the work at the constraint. In a balanced line, as dictated by Kanban, when one work center goes down, then the entire system must wait until that work center is restored. In a TOC system, the only situation where work is in danger is if the constraint is unable to process (either due to malfunction, sickness or a "hole" in the buffer).

Plant types

There are four primary types of plants in the TOC lexicon. Draw the flow of material from the bottom of a page to the top, and you get the four types. They specify the general flow of materials through a system, and they provide some hints about where to look for typical problems. The four types can be combined in many ways in larger facilities.

• I-Plant: Material flows in a sequence, such as in an assembly line. The primary work is done in a straight sequence of events (one-to-one). The constraint is the slowest operation.
• A-Plant: The general flow of material is many-to-one, such as in a plant where many sub-assemblies converge for a final assembly. The primary problem in A-plants is in synchronizing the converging lines so that each supplies the final assembly point at the right time.
• V-Plant: The general flow of material is one-to-many, such as a plant that takes one raw material and can make many final products. Classic examples are meat rendering plants or a steel manufacturer. The primary problem in V-plants is "robbing" where one operation (A) immediately after a diverging point "steals" materials meant for the other operation (B). Once the material has been processed by A, it cannot come back and be run through B without significant rework.
• T-Plant: The general flow is that of an I-Plant (or has multiple lines), which then splits into many assemblies (many-to-many). Most manufactured parts are used in multiple assemblies and nearly all assemblies use multiple parts. Customized devices, such as computers, are good examples. T-plants suffer from both synchronization problems of A-plants (parts aren't all available for an assembly) and the robbing problems of V-plants (one assembly steals parts that could have been used in another).

For non-material systems, one can draw the flow of work or the flow of processes and arrive at similar basic structures. A project, for example is an A-shaped sequence of work, culminating in a delivered project.

Applications

The focusing steps, or this Process of Ongoing Improvement has been applied to Manufacturing, Project Management, Supply Chain / Distribution generated specific solutions. Other tools (mainly the TP) also led to TOC applications in the fields of Marketing and Sales, and Finance. The solution as applied to each of these areas are listed below.

Operations

Within manufacturing operations and operations management, the solution seeks to pull materials through the system, rather than push them into the system. The primary methodology use is Drum-Buffer-Rope (DBR) and a variation called Simplified Drum-Buffer-Rope (S-DBR).

Drum-Buffer-Rope is a manufacturing execution methodology, named for its three components. The drum is the physical constraint of the plant: the work center or machine or operation that limits the ability of the entire system to produce more. The rest of the plant follows the beat of the drum. They make sure the drum has work and that anything the drum has processed does not get wasted.

The buffer protects the drum, so that it always has work flowing to it. Buffers in DBR have time as their unit of measure, rather than quantity of material. This makes the priority system operate strictly based on the time an order is expected to be at the drum. Traditional DBR usually calls for buffers at several points in the system: the constraint, synchronization points and at shipping. S-DBR has a buffer at shipping and manages the flow of work across the drum through a load planning mechanism.

The rope is the work release mechanism for the plant. Only a "buffer time" before an order is due does it get released into the plant. Pulling work into the system earlier than a buffer time guarantees high work-in-process and slows down the entire system.

Supply chain / logistics

The solution for supply chain is to move to a replenishment to consumption model, rather than a forecast model.

• TOC-Distribution
• TOC-VMI (vendor managed inventory)

Finance and accounting

The solution for finance and accounting is to apply holistic thinking to the finance application. This has been termed throughput accounting. Throughput accounting suggests that one examine the impact of investments and operational changes in terms of the impact on the throughput of the business. It is an alternative to cost accounting.

The primary measures for a TOC view of finance and accounting are: Throughput (T), Operating Expense (OE) and Investment (I). Throughput is calculated from Sales (S) - Totally Variable Cost (TVC). Totally Variable Cost usually considers the cost of raw materials that go into creating the item sold.

Project management

Critical Chain Project Management (CCPM) is utilized in this area. CCPM is based on the idea that all projects look like A-plants: all activities converge to a final deliverable. As such, to protect the project, there must be internal buffers to protect synchronization points and a final project buffer to protect the overall project.

Marketing and sales

While originally focused on manufacturing and logistics, TOC has expanded lately into sales management and marketing. Its role is explicitly acknowledged in the field of sales process engineering. For effective sales management one can apply Drum Buffer Rope to the sales process similar to the way it is applied to operations (see Reengineering the Sales Process book reference below). This technique is appropriate when your constraint is in the sales process itself or you just want an effective sales management technique and includes the topics of funnel management and conversion rates.

The TOC thinking processes

Main article: Thinking Processes (Theory of Constraints)

The Thinking Processes are a set of tools to help managers walk through the steps of initiating and implementing a project. When used in a logical flow, the Thinking Processes help walk through a buy-in process:

1. Gain agreement on the problem
2. Gain agreement on the direction for a solution
3. Gain agreement that the solution solves the problem
4. Agree to overcome any potential negative ramifications
5. Agree to overcome any obstacles to implementation

TOC practitioners sometimes refer to these in the negative as working through layers of resistance to a change.

Recently, the Current Reality Tree (CRT) and Future Reality Tree (FRT) have been applied to an argumentative academic paper .

Development and practice

TOC was initiated by Dr. Eliyahu M. Goldratt, being still the main driving force behind the development and practice of TOC. There is a network of individuals and small companies loosely coupled as practitioners around the world. TOC is sometimes referred to as "Constraint Management". TOC is a large body of knowledge with a strong guiding philosophy of growth.

Criticism

Criticisms that have been leveled against TOC include:

It isn't part of mainstream business education

While TOC has applications in TOC factory operations, project management, and supply chain, TOC is not part of the mainstream curriculum in business or Operations Research programs. Thus it must not be a valid technique. D. Trietsch argues that much of TOC is based on previous academic knowledge and complains that Goldratt and the TOC community do not do enough to acknowledge this legacy.

Rebuttal: TOC is an element of many business school education programs, most often with The Goal being required reading. That said, it isn't clear whether the business school programs do anything with the information contained in The Goal and other TOC literature.

Rebuttal Also: For a technique to be valid does not mean that it needs to be in the mainstream curriculum. It just needs to be valid and that should be proven based on it's results not academia.

Effectiveness of Drum-Buffer-Rope

While TOC has been compared favorably to linear programming techniques, D. Trietsch from University of Auckland argues that DBR methodology is inferior to competing methodologies.

Unacknowledged debt

Duncan (as cited by Steyn) says that TOC borrows heavily from systems dynamics developed by Forrester in the 1950s and from statistical process control which dates back to World War II. And Noreen Smith and Mackey, in their independent report on TOC, point out that several key concepts in TOC "have been topics in management accounting textbooks for decades."

People claim Goldratt's books fail to acknowledge that TOC borrows from more than 40 years of previous Management Science research and practice, particularly from PERT/CPM and JIT. A rebuttal to these criticisms is offered in Goldratt's "What is the Theory of Constraints and How Should it be Implemented?", and in his audio program, "Beyond The Goal". In these, Goldratt discusses the history of disciplinary sciences, compares the strengths and weaknesses of the various disciplines, and acknowledges the sources of information and inspiration for the Thinking Processes and Critical Chain methodologies. Articles published in the now-defunct Journal of Theory of Constraints referenced foundational materials. Goldratt published an article and gave talks with the title "Standing on the Shoulders of Giants" in which he gives credit for many of the core ideas of Theory of Constraints. Goldratt has sought many times to show the correlation between various improvement methods. However, many Goldratt adherents often denigrate other methodologies as inferior to TOC.

See also

• Linear programming
• List of Theory of Constraints topics
• Systems thinking — Critical systems thinking — Joint decision traps
• Twelve leverage points by Donella Meadows
• Constraint
• Thinklets
• Throughput
• Model management

Further reading

• Cox, Jeff; Goldratt, Eliyahu M. (1986). The goal: a process of ongoing improvement. [Great Barrington, MA]: North River Press. ISBN 0-88427-061-0.{{cite book}}: CS1 maint: multiple names: authors list (link)
• Dettmer, H. William. (2003). Strategic Navigation: A Systems Approach to Business Strategy. [Milwaukee, WI]: ASQ Quality Press. p. 302. ISBN 0-87389-603-3.
• Dettmer, H. William. (2007). The Logical Thinking Process: A Systems Approach to Complex Problem Solving. [Milwaukee, WI]: ASQ Quality Press. p. 413. ISBN 978-0-87389-723-5.
• Goldratt, Eliyahu M. (1994). It's not luck. [Great Barrington, MA]: North River Press. ISBN 0-88427-115-3.
• Goldratt, Eliyahu M. (1997). Critical chain. [Great Barrington, MA]: North River Press. ISBN 0-88427-153-6.
• Carol A. Ptak; Goldratt, Eliyahu M.; Eli Schragenheim. Necessary But Not Sufficient. [Great Barrington, MA]: North River Press. ISBN 0-88427-170-6.{{cite book}}: CS1 maint: multiple names: authors list (link)
• Goldratt, Eliyahu M. Essays on the Theory of Constraints. [Great Barrington, MA]: North River Press. ISBN 0-88427-159-5.
• Goldratt, Eliyahu M. Theory of Constraints. [Great Barrington, MA]: North River Press. ISBN 0-88427-166-8.
• Goldratt, Eliyahu M. Beyond the Goal : Eliyahu Goldratt Speaks on the Theory of Constraints (Your Coach in a Box). Coach Series. ISBN 1-59659-023-8.
• Dr Lisa Lang. Achieving a Viable Vision: The Theory of Constraints Strategic Approach to Rapid Sustainable Growth. Throughput Publishing, Inc. ISBN 0-9777604-1-3.
• Goldratt, Eliyahu M. (1990). The haystack syndrome: sifting information out of the data ocean. [Great Barrington, MA]: North River Press. ISBN 0-88427-089-0.
• Fox, Robert; Goldratt, Eliyahu M. (1986). The race. [Great Barrington, MA]: North River Press. ISBN 0-88427-062-9.{{cite book}}: CS1 maint: multiple names: authors list (link)
• Schragenheim, Eli. (1999). Management dilemmas. [Boca Raton, FL]: St. Lucie Press. p. 209. ISBN 1-57444-222-8.
• Schragenheim, Eli, and Dettmer, H. William. (2000). Manufacturing at warp speed: optimizing supply chain financial performance. [Boca Raton, FL]: St. Lucie Press. p. 342. ISBN 1-57444-293-7.{{cite book}}: CS1 maint: multiple names: authors list (link)
• Schragenheim, Eli, Dettmer, H. William, and Patterson, J. Wayne. (2009). Supply chain management at warp speed: integrating the system from end to end. [Boca Raton, FL]: CRC Press. p. 220. ISBN 978-1-4200-7335-7. {{cite book}}: Check |isbn= value: checksum (help)CS1 maint: multiple names: authors list (link)
• John Tripp TOC Executive Challenge A Goal Game. ISBN 0-88427-186-2
• Goldratt, Eliyahu M. Production the TOC Way with Simulator. North River Pr. ISBN 0-88427-175-7. {{cite book}}: Cite has empty unknown parameter: |unused_data= (help); Text "Great Barrington, MA" ignored (help)
• Stein, Robert E. Re-Engineering The Manufacturing System. Marcel Dekker. ISBN 0-8247-4265-6.
• Stein, Robert E. The Theory Of Constraints. Marcel Dekker. ISBN 0-8247-0064-3.

External links

• What is TOC? - In a video Dr. Eliyahu M. Goldratt Explains the definition of Theory of Constraints.
• An Online Guide To The Theory Of Constraints - Fundamentals, Thinking Process, Production, Projects, Supply Chain,
• Template:Fr Chaîne Critique - A French website dedicated to Goldratt's Critical Chain Project Management approach.

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