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Eight Things You Need to Know About the Theory of Constraints

May 12, 2020 | By River Logic

Students studying operations management are bound to come across the book by Dr. Eliyahu Goldratt called The Goal. In this classic from 1984, Goldratt reveals a set of "thinking tools" he developed, called the Theory of Constraints (TOC), and how he uses them to solve a range of problems at a fictional manufacturing plant.

This concept centers around practical methods for identifying solutions to business problems by deciding:

  • What to change
  • What to change it to
  • How to cause the change

The key focus of the Theory of Constraints is identifying constraints or bottlenecks in any process, and working out how to eliminate or reduce their impact. In his book, a constraint was defined as anything that prevents the system from achieving its goal.

Theory of Constraints Principles

So, what is the Theory of Constraints? Goldratt proposed that every real system must have at least one if not more than one constraint preventing it from achieving better or higher levels of performance. If this was not the case, there would be no limits and growth would be exponential.

These constraints limit performance, and unless they are addressed, performance will not nor cannot improve. Typical Theory of Constraints examples would include:

  • Machine capacity
  • Sales saturation
  • Limited demand
  • Raw materials shortage

In each case, unless the constraint is addressed, output is limited by that constraint.

To overcome this, Goldratt proposed five Theory of Constraints steps, known as the five focusing steps. These are:

  • Identify the limiting constraint
  • Exploit the constraint with existing resources
  • Subordinate and align all associated activities
  • Alleviate the constraint by investing in additional resources and equipment
  • Repeat the process to identify the next constraint

A System-Wide Approach

One of the key principles of TOC is that you need to consider the entire system, not just one aspect, and identify the real constraint. If this isn't done, it's likely that improvements to one part of the system will most likely make no difference to overall results, and it is even possible that an improvement to one part will make the overall result worse. Dr Goldratt felt so strongly about this that he is quoted as saying:

"Any improvements made anywhere besides the bottleneck are an illusion."

For example, in healthcare, adding more beds to a hospital likely won't improve quality of care if the real problem is a bottleneck in the emergency department. Or, in software, adding additional sales executives won't drive revenue growth if there aren't enough people ready to buy the product.

Identifying Unique Constraints

One of the core principles within TOC is that in any system, there aren't tens or hundreds of constraints that affect output. In fact, at most there are a few in any given system, and in many instances, even highly complex situations, there's only one constraint that limits output at any point in time.

The trick is identifying that particular constraint. While this may be self-evident in a simple production line, it's altogether another matter in highly complex organizations and one of the reasons why leading companies are using advanced analytics to identify constraints.

TOC Constraints Are Not the Same as Mathematical Constraints

One of the difficulties analysts have is understanding that constraints as defined by the Theory of Constraints are not the same as constraints as defined in mathematical and system models. While there are similarities, the precise definition of a constraint differs depending upon the approach.

In mathematical modeling, a constraint is a restriction or limitation applied to a variable to restrict answers to real-world values. For example, an equation that represents the number of people who can be processed during college registration could theoretically have a negative answer, but in real life this is impossible; the minimum number of students processed cannot be below zero, which becomes a constraint.

Similarly, legal requirements such as restricting the volume of chemicals stored on a particular site would be constraints in a mathematical process model, but would not necessarily be a Theory of Constraints example unless they also limited plant output. In TOC, a constraint is always a limiting factor or weak link that inhibits an organization from achieving a particular goal, such as a revenue target.

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The Current Reality Tree

One of the useful TOC tools is the Current Reality Tree that presents a picture of the current state of the organization and is used to highlight the root cause for why a particular system or process is not up to scratch. This is often used together with an Evaporating Cloud Tree to evaluate improvements and a Future Reality Tree that documents what the system will look like after improvements.

Plant Type Analysis

A plant type analysis describes how materials or activities move through the process. Known as a VATI analysis, plant types include:

  • V plant: Where one material or input can be processed into different components, such as milk into cheese, cream or ice cream.
  • A Plant: A typical assembly line process where many parts go toward making one product.
  • T Plant: A more complex situation where several parts, once assembled, can be fitted to different products.
  • I Plant: Where many parts have to flow sequentially through a common process, such as a paint shop, before final assembly.

Determining the type of plant or process helps understand the constraints limiting throughput.

Throughput Accounting

This represents a different view of accounting from traditional account methods. It focuses on three elements: throughput, investment and operating expense. Instead of the conventional accounting approach of cutting expenses, Throughput Accounting focuses on increasing throughput to raise net profit, return on investment and productivity. The methodology differs from conventional accounting in that plants, inventory and buildings are regarded as liabilities tying up cash that could be used productively elsewhere. Throughput is defined as all sales less truly variable costs, while operating expenses represent costs that aren't variable.

In principle, Throughput Accounting has less focus on cutting costs and more on building profitable sales.

Using Optimization Modeling in TOC

While the Theory of Constraints model of identifying and alleviating critical bottlenecks is straightforward, actually identifying those bottlenecks isn't easy. The TOC toolbox has numerous tools to facilitate that process, but they are not easy to apply in large and complex organizations.

It should be remembered that when The Goal was written, Steve Jobs had just announced the Macintosh and organizations relied extensively on paper flows. This isn't the case anymore, and even medium-sized organizations operate with a degree of complexity that was unthinkable thirty-five years ago.

It made sense, then, to focus the company on a single goal and a single constraint, and this is still the case. In optimization modeling, that goal is referred to as an objective function, and, for most companies, the objective function is to maximize profit. Using optimization software, it's possible to model the organization and determine opportunity values, which are almost the same as identifying critical constraints. Using solver software, managers can determine the best way forward to alleviate organizational constraints and achieve the organization goals.

Optimization software sets out to achieve exactly the same goals as the Theory of Constraints:

  • What to change
  • What to change it to
  • How to cause the change

Benefits of the Theory of Constraints Approach

The beauty of TOC is that it simplifies complex situations with unique and easy-to-understand answers. It helps management focus on what's important by identifying individual constraints that inhibit the organization from achieving its goals.

The process allows organizations to identify the root cause for poor performance. In doing so, it opens the way to exploit the constraint, ensure associated processes are aligned to minimize interference, and to elevate the constraint. In simple terms, TOC identifies the primary bottleneck, allowing organizations to increase throughput by modifying or removing the constraint through additional investment.

This deceptively simple approach works, and there are many Theory of Constraints real-life examples that illustrate how TOC has helped organizations grow through identifying constraints and bottlenecks and dealing with them.

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