Theory of Constraints

One of business management theories is The theory of constraints ( TOC ),its created by Dr. Eli Goldratt,and it is based on:

" a assumption that every system has at least one constraint limiting it from getting more of what it strives for. If this were not true, then the system would produce infinite output."

For example, a for-profit organization would make business process management and endless profits. Constraints determine the output of a system whether they are acknowledged or not. Therefore, it is in a manager’s best interest to identify and “exploit” system constraints within the organization.

The theory of constraints is both descriptive and prescriptive in nature; it not only describes why system constraints happen but also offers guidance on what to do about them. This page provides an overview of both; however, it begins with a discussion of some key underlying concepts:

· Systems as chains

· Throughput, inventory, and operating expense (T, I, OE)

Systems as chains

A system is generally defined as a collection of interrelated, independent processes that work together to turn inputs into outputs in the pursuit of some goal.

As pictured above , the chain has one “weakest link.” If force is applied to the chain at an increasing rate, it would eventually break at this point.

Therefore, the weakest link is the constraint that prevents the chain (system) from doing any better at achieving its goal (transmitting force).

Goldratt states that there is only one constraint in a system at any given time limiting the output of the entire system. The remaining “links” are known as nonconstraints.

When one constraint is strengthened, however, the system does not become infinitely stronger. The constraint simply migrates to a different component of the system, i.e., some other link is now the weakest and all other links are nonconstraints. The system is stronger than it was but still not as strong as it could be.

To better understand the theory of Constraints and nonconstraints, consider a sample production system that runs raw materials through three component processes and turns them into a finished product, as pictured

Within the system, each process is equivalent to a link in the production chain. Where is the constraint in this chain? Process B is the weakest link since it

produces only six units per day no matter how many the rest of the components produce. Where are the nonconstraints? Everywhere else.

Imagine that the manufacturer improves process B until it can produce 18 units per day. Now, process C becomes the system constraint while the nonconstraints are everywhere else. If process improvements continue until all processes are producing 18 units/day or higher, the system constraint becomes the marketplace, which can accept only 15 units per day.

At this point, internal constraints have been replaced by an external constraint. Overall, the theory of constraints emphasizes fixing the weakest link in the chain—the system constraint—and temporarily ignoring the nonconstraints. In this way, the theory has a profound impact on process improvement.

Rather than spreading limited time, energy, and resources across an entire system (which may or may not result in tangible results), teams focus on that part of the system with the potential to produce immediate system improvement.

Throughput, inventory, and operating expense

In order to determine the effect that any local action has on progress toward a system goal, Goldratt created a simple relationship between three system-level dimensions: throughput (T), inventory (I), and operating expense (OE), as defined below .

Given Goldratt’s three dimensions, organizations have three different options for system improvement: increasing T, reducing I, or reducing OE.

The practical limits of reducing inventory and operating expenses are relatively low, as a system can’t produce many outputs without them. Theoretically, there’s no upper limit to how much an organization can increase its throughput, but market sizes are limited.

Still, the potential for increasing T is always likely to be much higher than the potential for decreasing I and OE. Therefore, a basic model for system improvements is to expend as much as effort as possible on activities that tend to primarily increase T and make reduction of I and OE a secondary priority, as shown below

Together, the concepts of T, I, OE and systems as chains are woven into the theory of constraint’s descriptive and prescriptive nature. The content that follows examines these in turn by first considering the TOC’s underlying principles (descriptive) and then discussing its primary steps and tools for improvement (prescriptive).

Basic principles

Goldratt outlines several principles that help create a environment conducive to the prescriptive part of his theory.

The prescriptive part of the theory of constraints is designed to help organizations answer three management questions regarding systems and their constraints:

· Where is the constraint? (what to change)

· What should we do with the constraint? (what to change to)

· How do we implement the change? (how to cause the change)

The five focusing steps

Step 1: Identify the system constraint.

In the first step, an organization identifies what part of the system constitutes the weakest link and determines whether it is a physical constraint or a policy-related issue.

Step 2: Decide how to exploit the constraint.

Organizations “exploit” the constraint by utilizing every bit of the constraining component without committing to potentially expensive changes and/or upgrades.

Step 3: Subordinate everything else.

With a plan in place for exploiting the constraint, organizations adjust the rest of the system to enable the constraint to operate at maximum effectiveness and then evaluate the results to see if the constraint is still holding back system performance. If it is, the organization proceeds to Step 4. It it’s not, the constraint has been eliminated and the organization skips ahead to Step 5.

Step 4: Elevate the constraint.

If an organization reaches Step 4, it means that Steps 2 and 3 were not sufficient in eliminating the constraint. At this point, the organization elevates the constraint by taking whatever action is needed to eliminate it. This may involve major changes to the existing system, such as reorganization, divestiture, or capital improvements. Since these typically require a substantial up-front investment, the organization should be certain that the constraint cannot be broken in Steps 1 through 3 before proceeding.

Step 5: Go back to Step 1

But beware of inertia. After a constraint is broken, the organization repeats the steps all over again, looking for the next thing constraining system performance. At the same time, it monitors how changes related to subsequent constraints may impact the constraints that are already broken, thus preventing solution inertia.

The five logical tools

· Current reality tree (CRT). Helps organizations work backward from an undesirable effect to identify the core problem, i.e., the constraint pursued in the five focusing steps.

· Conflict resolution diagram (CRD). Allows organizations to resolve hidden conflicts that usually perpetuate chronic problems (also known as the “evaporating cloud”)

· Future reality tree (FRT). Enables organizations to verify that an action will produce the desired results and to identify and remove any unfavorable new consequences the action might have

· Prerequisite tree (PRT). Helps organizations implement a decision by providing a recommended sequence of events and identifying potential obstacles

· Transition tree (TT). Provides organizations with a detailed, step-by-step action plan for implementing a decision The “glue” holding all of the trees together is known as the categories of legitimate reservation (CLR): eight rules, or tests, of logic governing the trees’ construction. These include:

· Clarity.

· Entity existence.

· Causality existence.

· Cause sufficiency.

· Additional cause.

· Cause-effect reversal.

· Predicated effect existence.

· Tautology.

To be logically sound, a tree must be able to pass all of these tests. In practice, the five logic trees can be used individually or together as an integrated thinking process. picture below shows how the five tools can be used together in answering the three management questions about change.

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