Theory of constraints

Theory of constraints (TOC) is an overall management philosophy that aims to continually achieve more of the goal of a system. If that system is a for-profit business, then the goal becomes one of making more money, in the present as well as in the future.

According to TOC, every profit making organization must have at least one constraint, which prevents the system from achieving a higher performance relative to its goal (Liebig's Law of the Minimum). These constraints can be broadly classified as internal resource constraint, market constraint and policy constraint. In order to manage the performance of the system, these constraints must be identified and treated carefully.

Implementing TOC

Theory of Constraints is based on the premise that the rate of revenue generation is limited by at least one constraining process (i.e. a bottleneck). Only by increasing throughput (production rate) at the bottleneck process can overall throughput be increased.

The key steps in implementing an effective TOC approach are:

Identify the constraint (bottlenecks are identified by inventory pooling before the process)
Exploit the constraint (increase its utilisation and efficiency)
Subordinate all other processes to the constraint process (other processes serve the bottleneck)
Elevate the constraint (if required, permanently increase bottleneck capacity)
Rinse and repeat (after taking action, the bottleneck may have shifted or require further attention)

The TOC Thinking Tools

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

Gain agreement on the problem
Gain agreement on the direction for a solution
Gain agreement that the solution solves the problem
Agree to overcome any potential negative ramifications
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.

The thinking process, as codified by Goldratt and others:

Current Reality Tree (CRT, similar to the current state map used by many organizations) - evaluates the network of cause-effect relations between the undesirable effects (UDE's, also known as gap elements) and helps to pinpoint the root cause(s) of most of the undesirable effects.
Evaporating Cloud (conflict resolution diagram or CRD) - solves conflicts that usually perpetuate the causes for an undesirable situation.
Core Conflict Cloud (CCC) - A combination of conflict clouds based several UDE's. Looking for deeper conflicts that create the undesirable effects.
Future Reality Tree (FRT, similar to a future state map) - Once some actions (injections) are chosen (not necessarily detailed) to solve the root cause(s) uncovered in the CRT and to resolve the conflict in the CRD the FRT shows the future states of the system and helps to identify possible negative outcomes of the changes (Negative Branches) and to prune them before implementing the changes.
Negative Branch Reservations (NBR) - Identify potential negative ramifications of any action (such as an injection, or a half-baked idea). The goal of the NBR is to understand the causal path between the action and negative ramifications so that the negative effect can be "trimmed."
Positive Reinforcement Loop (PRT) - Desired effect (DE) presented in FRT amplifies intermediate objective (IO) that is earlier (lower) in the tree. While intermediate objective is strengthened it positively affects this DE. Finding out PRLs makes FRT more sustaining.
Prerequisite Tree (PRT) - states that all of the intermediate objectives necessary to carry out an action chosen and the obstacles that will be overcome in the process.
Transition Tree (TT) - describes in detail the action that will lead to the fulfilment of a plan to implement changes (outlined on a PRT or not).
Strategy & Tactics (S&T) - the overall project plan and metrics that will lead to a successful implementation and the ongoing loop through POOGI.

Some observers note that these processes are not fundamentally very different from some other management change models such as PDCA "Plan-Do-Check-Act" (which is quite often now displayed as PDSA for Plan-Do-Study-Act as 'checking' merely indicates it's been looked at where 'studying' fosters a proactive approach) or "Survey-Assess-Decide-Implement-Evaluate", but the way they can be used is clearer and more straightforward. More on this can be seen on Goldratt's Theory of Constraints - A Systems Approach to Continuous Improvement by William Dettmer ISBN 0-87389-370-0.

Throughput Accounting

Throughput accounting refers to a specific accounting methodology linked to the Theory of Constraints. 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.

Application-specific TOC solutions

Operations

Within manufacturing operations and operations management, the solution seeks to pull materials through the system, rather than push them into the system.

Drum-Buffer-Rope

A fundamental principle of "Synchronous Manufacturing" can be illustrated by the example of an auditorium with one exit. If the people are instructed to leave the auditorium, the rate at which people can walk through the door is the same, regardless of the number of people in the auditorium. The particulars of the doorway set the rate (#/time) at which people can exit. The capacity of a factory to produce a certain number of products in a certain period of time is likened to the number of people who can walk through the doorway in a given period of time. The inventory of materials in process is like the number of people in the auditorium.

The realization that the inventory on hand is not simply related to the factory output is one of the most basic and important underpinnings of SM.

For reference, you can read Chapter 37 of "The Goal", where DBR is summarized.

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. 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 "stealing" where one operation (A) at a diverging point "steals" materials from the other (B). Once it has processed through A, it cannot come back and run through B without significant rework.
T-Plant: The general flow is that of an I (or multiple lines), which then split into many assemblies. 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 stealing problems of V-plants (one assembly steals parts that could have been used in another).

Supply Chain / Logistics

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

TOC-Distribution
TOC-VMI (vendor managed inventory)

Finance and Accounting

Use throughput accounting with T, OE, and I to make decisions.

Project Management

Critical Chain Project Management. Based on the realization that all projects look like A-plants: all operations must converge to a final deliverable. As such, synchronization of activities is a common problem that CCPM seeks to address.

Marketing and Sales

While originally focused on manufacturing and logistics, TOC has expanded lately into sales management. First data shows that the sales system is massively constrained and TOC offers significant opportunity to increase enterprise throughput = sales results

Solution for Sales

The Six Necessary and Sufficient Questions relating to Technology

What is the real power of the technology?
What limitation does it diminish?
What old rules helped accommodate the limitation?
What are the new rules that should be used now?
In light of the change in rules, what changes are required to the technology?
How to cause the change (the new win/win business model)?

Development and practice

TOC has been initiated by Eliyahu M. Goldratt and is being actively developed by a loosely coupled community of practitioners around the world. TOC is sometimes referred to as "Constraint Management".

The TOC International Certification Organization maintains a variety of TOC certifications.

References

Novels

Eliyahu M. Goldratt and Jeff Cox. The Goal: A Process of Ongoing Improvement. ISBN 0-88427-061-0
Eliyahu M. Goldratt. It's Not Luck. ISBN 0-88427-115-3
Eliyahu M. Goldratt. Critical Chain. ISBN 0-88427-153-6
Eliyahu M. Goldratt, Eli Schragenheim and Carol A. Ptak. Necessary But Not Sufficient. ISBN 0-88427-170-6
Richard Klapholz and Alex Klarman The Cash Machine - Using The Theory of Constraints for Sales Management ISBN 0-88427-177-3
Ray Immelman. Great Boss-Dead Boss. ISBN 0-9740369-1-9
Julie Wright and Russ King. We All Fall Down: Goldratt's Theory of Constraints for Healthcare Systems. ISBN 0-88427-181-1