An Israeli physicist, Eliyahu Goldratt wrote a book titled ‘The Goal’, about a factory manager’s quest to save his factory from being closed down for lack of profitability. It chronicles the process that the manager and his staff go through as they learn how to save their factory. What they learn is how to apply the principles of what Mr. Goldratt calls the “Theory of Constraints.”
Theory of Constraints (TOC) is a logic-driven approach which focuses on system improvement. The core idea of TOC is that every organization has at least one constraint that prevents management from achieving the goal of the organization to a larger degree.
A system can be defined as a collection of interrelated, interdependent components or processes that act in concert to turn inputs into defined outputs in pursuit of a particular goal. Linking systems to chains, TOC defines weakest link as a Constraint. Constraint limits the systems performance. A constraint determines the maximum capacity of a System. Theory of Constraints assumes that every system has at least one constraint that prevents from achieving the system goals. The performance of the entire system is limited by the constraint. Constraints can be physical resources or policies. TOC develops a set of procedures and methodologies to identify and optimize such constraints. Theory of Constraints helps to increase throughput, reliability, and quality while decreasing inventory, late deliveries, and overtime.
Goldratt introduced a method called the five focusing steps for addressing system problems on a continuous improvement basis. The steps are:
- Identify the constraint: Identify the operation that is limiting the productivity of the system. This may be a physical or policy constraint. There may be more than one constraint, but we need to focus on the constraint impacting the most.
- Exploit the constraint: Achieve the best possible output from the constraint. Remove limitations that constrain the flow, and reduce non-productive time, so that the constraint is used in the most effective way possible
- Adjust other activities as per the constraint: Link the output of other operations to suit the constraint. Smooth work flow and avoid build-up of work-in-process inventory. Avoid making the constraint wait for work.
- Elevate the constraint: In situations where the system constraint still does not have sufficient output invest in new equipment or increase staff numbers to increase output.
- Repeat the cycle: Assess to see if another operation or policy has become the system constraint.
As can be seen from the above, one of the central tenets of Theory of Constraints is that any system has constraints that prevent it from achieving its goal. The place to focus efforts is on making those constraints produce more, either by acting on the constraints directly, or on other operations interacting with them. The Five Focusing Steps of TOC provide a simple but effective approach to continuous improvement in cases where the constraint is fairly clearly identifiable. However where the constraint is caused by policies or behaviors, or in other more complex and messy situations, the constraint may be harder to pinpoint, and what should be done to rectify it is not as clear-cut.
Constraint management is based on the Theory of Constraints which looks at companies as systems. A system is defined as a collection of interrelated, interdependent components or processes that act together to turn inputs into defined outputs which helps in achieving a particular goal. In Constraint Management, constraint is considered as the weakest link. So, constraint is any factor that affects system’s performance and restricts the systems output.
There are two types of constraints: physical constraints and policy constraints. A physical constraint can be a capacity constrained resource (a resource where the capacity is near the demand placed on the resource) such as a machine or a person or the market itself and where excess capacity can result if the demand dries up. A policy constraint is the prevalent type of constraint and can be any business rule that conflicts with the goal of making more money. For example, suggested use of large batch sizes in order to be “efficient” but at the expense of longer lead times can become a policy constraint. Consider a business as a money making machine where the money enters the machine and gets captured inside, which helps in explaining the value of constraint management. “Throughput” is the rate at which machine generates money through sales. “Inventory” is the money captured in the machine. “Operating Expense” is the money the machine uses to turn inventory into throughput. Short term and Non-variable costs are the unavoidable costs of doing business where the employees must be paid irrespective of the number of units sold over the next financial period. Throughput, Inventory and Operating expenses can be easily tied to the bottom line in the financial measures of net profit and Return on Investment (ROI).
According to Constraint management, the greatest improvements are achieved by addressing issues at the weakest links in the chain and improvements of non-constraints have very little positive effect on the overall system.