Theory of Constraints is a broadly applicable approach to managing business operations within an organization. Basically, the theory of constraints is a management philosophy designed to help organizations achieve their goals.
The idea is to identify the goals of the organization, identify the factors that hinder the achievement of those goals, and then improve the business operations by continuously striving to mitigate or eliminate the limiting factors.
The limiting factors are called bottlenecks or constraints. At any given time, an organization is faced with at least one constraint that limits business operations. Typically, as one constraint is eliminated another constraint will arise. The organization should then focus its attention on the new constraint. And this process repeats itself continuously.
According to the theory of constraints, the best way for an organization to achieve its goals is to reduce operating expenses, reduce inventory, and increase throughput. The theory of constraints includes three core principles, six steps for implementation, and a five step thinking process.
The theory of constraints was formalized and introduced by Dr Eliyahu Goldratt in the 1980s in his book The Goal. Goldratt subsequently published other books and gave seminars and workshops on the theory of constraints. Also, other papers and books have been written about the theory of constraints by other authors.
The theory of constraints has three principles. These three principles are: convergence, consistency, and respect.
The convergence principle implies that a complex system is simpler to manage because an adjustment or correction to one aspect of the system will impact the whole system. The consistency principle implies that any internal conflict must be the result of at least one flawed assumption. And the respect principle implies that humans are inherently good and deserving of respect even when they make mistakes.
There are six steps for implementing the theory of constraints. The first one is to identify a measurable goal. This is typically defined as throughput, or the amount of products or services produced and sold to customers. Basically, the goal is some concrete objective that involves the company’s success and profitability.
The second step is to identify the bottleneck. This is any constraint that limits the production process. The constraint can be internal, such as a flaw or shortcoming in the production process, or it can be an external hindrance, such as a competitor or some other influential market force.
The third step is to exploit the bottleneck. This means making sure the bottleneck is being put to its most profitable use. If the bottleneck is some slow machine that cranks out two types of products, a very profitable product and a less profitable product, you should make sure the machine is always working on the more profitable product.
The fourth step is to subordinate all other factors in the operation to the bottleneck. This means optimizing the production process to the pace of the bottleneck. If the production process involves three machines, one can crank out 10 products per hour, another can crank out 20 products per hour, and the third can only crank out 3 products per hour, then you must operate the first to machines so they produce only 3 products per hour to keep pace with the bottleneck machine. This reduces excess inventory.
The fifth step is to increase the capacity of the bottleneck. For example, referring to the previous paragraph, if the bottleneck can only produce 3 products per hour, then you should try to increase that output rate. Perhaps by outsourcing that phase of production, or by purchasing two more of those machines to increase output. Basically, you’ve identified the constraint, and this is the step where you mitigate or eliminate it – alter the process so this factor is no longer a constraint.
And the sixth step is to start the process over with the next bottleneck. There is always at least one factor limiting the process. When you successfully manage that factor, another bottleneck will arise as the constraint. Implementing the theory of constraints method of process improvement is a never-ending endeavor.
Below is the TOC six steps:
1. Identify the goal
2. Identify the constraint
3. Exploit the constraint
4. Subordinate operations to the constraint
5. Increase constraint capacity
6. Repeat with a new constraint
The theory of constraints also includes a 5-step theory of constraints thinking process designed to organize the thought process involved in approaching a bottleneck and trying to resolve the problem relating to the constraint.
The five steps are as follows:
First, the people involved must agree on the problem. That is, they must all agree which factor is the bottleneck.
The third step is to get everyone to agree that the solution will resolve the problem. That is, the proposed solution is the correct action for eliminating the bottleneck in question.
The fourth step is to look past potential negative ramifications of the process.
Finally, the fifth step is to overcome any hindrances to the implementation of the solution to the problem.
There are several benefits to Goldratt’s theory of constraints. It is an organized way to approach a business operation and to try to improve it. TOC takes the analytical and diagnostic process and lays it out into a step-by-step procedure.
Also, the theory of constraints allows the managers involved in the process to focus on the constraints in the process. It is a way to galvanize efforts and energies and to focus attention on a single aspect of the process with the intention of correcting a clear problem to arrive at a clear solution.
Also, the organization that adopts and implements the theory of constraints will be continuously striving for process improvement. This is a way to ward of inertia and complacency and will most likely result in operations that continue to get more efficient and more productive and more profitable over time.
Some criticisms of Goldratt’s theory of constraints include the idea that Goldratt himself treats the theory as a product to sell and he acts as a salesman. Also, some say Goldratt’s theory of constraints borrows ideas and concepts from previous studies and theories, but Goldratt does not acknowledge these contributions to his theory.
Wikipedia article – “Theory of Constraints”; www.wikipedia.com
Hilton, Ronald W., Michael W. Maher, Frank H. Selto. “Cost Management Strategies for Business Decision”, Mcgraw-Hill Irwin, New York, NY, 2008.
Cox, Jeff, Eliyahu M. Goldratt, “The Goal”, North River Press, Great Barrington MA, 2004.