What is the Theory of Constraints?
The Theory of Constraints is an organizational change method that is focused on profit improvement. The essential concept of TOC is that every organization must have at least one constraint. A constraint is any factor that limits the organization from getting more of whatever it strives for, which is usually profit. The Goal focuses on constraints as bottleneck processes in a job-shop manufacturing organization. However, many non-manufacturing constraints exist, such as market demand, or a sales department's ability to translate market demand into orders.
The Theory of Constraints defines a set of tools that change agents can use to manage constraints, thereby increasing profits. Most businesses can be viewed as a linked set of processes that transform inputs into saleable outputs. TOC conceptually models this system as a chain, and advocates the familiar adage that a "chain is only as strong as its weakest link." Goldratt defines a five-step process that a change agent can use to strengthen the weakest link, or links. In The Goal, Goldratt proves that most organizations have very few true constraints. Since the focus only needs to be on the constraints, implementing TOC can result in substantial improvement without tying up a great deal of resources, with results after three months of effort.
The Five Steps of the Theory of Constraints
Identify the System Constraint
The part of a system that constitutes its weakest link can be either physical or a policy. 2.
Decide How to Exploit the Constraint
Goldratt instructs the change agent to obtain as much capability as possible from a constraining component, without undergoing expensive changes or upgrades. An example is to reduce or eliminate the downtime of bottleneck operations. 3.
Subordinate Everything Else
The non-constraint components of the system must be adjusted to a "setting" that will enable the constraint to operate at maximum effectiveness. Once this has been done, the overall system is evaluated to determine if the constraint has shifted to another component. If the constraint has been eliminated, the change agent jumps to step five. 4.
Elevate the Constraint
"Elevating" the constraint refers to taking whatever action is necessary to eliminate the constraint. This step is only considered if steps two and three have not been successful. Major changes to the existing system are considered at this step. 5.
Return to Step One, But Beware of "Inertia"
Goldratt cautions practitioners about becoming complacent. TOC is an on-going process, and the inertia that can build up after a change occurs can actually serve to prevent continuous improvement.
Goldratt also provides a foundation for achieving change through TOC by defining a set of three essential measurements that drive the change process. He correctly realized that conventional accounting systems do not support TOC, or lean-based efforts. Goldratt proposes replacing all traditional measures derived from the "product cost" accounting paradigm. The following measures are the only way to increase profit through TOC:
The rate at which the entire organization generates money through sales for a product or service. Throughput represents all the money coming into an organization. Inventory
All the money the organization invests in things it intends to sell. Inventory represents all the money tied-up inside an organization. Goldratt's definition includes facilities, equipment, obsolete items, as well as raw material, work in process, and finished goods. Operating Expense
Operating Expense is all the money an organization spends turning Inventory into Throughput. It represents the money going-out of the organization. Examples include direct labour, utilities, consumable supplies, and depreciation of assets.
All three of these measures are interdependent. This means that a change in one will result in a change in one or more of the...
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