The core concept of the Theory of Constraints is that every process has a single constraint and that total process throughput can only be improved when the constraint is improved. A very important corollary to this is that spending time optimizing non-constraints will not provide significant benefits; only improvements to the constraint will further the goal (achieving more profit).
Thus, TOC seeks to provide precise and sustained focus on improving the current constraint until it no longer limits throughput, at which point the focus moves to the next constraint. The underlying power of TOC flows from its ability to generate a tremendously strong focus towards a single goal (profit) and to removing the principal impediment (the constraint) to achieving more of that goal. In fact, Goldratt considers focus to be the essence of TOC.
The Five Focusing Steps
The Theory of Constraints provides a specific methodology for identifying and eliminating constraints, referred to as the Five Focusing Steps. As shown in the following diagram, it is a cyclical process.
1. 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.
The Thinking Processes
The Theory of Constraints includes a sophisticated problem solving methodology called the Thinking Processes. The Thinking Processes are optimized for complex systems with many interdependencies (e.g., manufacturing lines). They are designed as scientific “cause and effect” tools, which strive to first identify the root causes of undesirable effects (referred to as UDEs), and then remove the UDEs without creating new ones.
The Thinking Processes are used to answer the following three questions, which are essential to TOC:
• What needs to be changed?
• What should it be changed to?
• What actions will cause the change?
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:
• Throughput: 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 other two.
Throughput Accounting has four key derived measures: Net Profit, Return on Investment, Productivity, and Investment Turns.
Net Profit = Throughput - Operating Expenses
Return on Investment = Net Profit / Investment
Productivity = Throughput / Operating Expenses
Investment Turns = Throughput / Investment
In general, management decisions are guided by their effect on achieving the following improvements (in order of priority):
• Will Throughput be increased?
• Will Investment be reduced?
• Will Operating Expenses be reduced?
The strongest emphasis (by far) is on increasing Throughput. In essence, TOC is saying to focus less on cutting expenses (Investment and Operating Expenses) and focus more on building sales (Throughput).
Drum-Buffer-Rope
Drum-Buffer-Rope (DBR) is a method of synchronizing production to the constraint while minimizing inventory and work-in-process.
The “Drum” is the constraint. The speed at which the constraint runs sets the “beat” for the process and determines total throughput.
The “Buffer” is the level of inventory needed to maintain consistent production. It ensures that brief interruptions and fluctuations in non-constraints do not affect the constraint. Buffers represent time; the amount of time (usually measured in hours) that work-in-process should arrive in advance of being used to ensure steady operation of the protected resource. The more variation there is in the process the larger the buffers need to be. An alternative to large buffer inventories is sprint capacity (intentional overcapacity) at non-constraints.
Typically, there are two buffers:
• Constraint Buffer: immediately before the constraint; protects the constraint
• Customer Buffer: at the very end of the process; protects the shipping schedule
The “Rope” is a signal generated by the constraint indicating that some amount of inventory has been consumed. This in turn triggers an identically sized release of inventory into the process. The role of the rope is to maintain throughput without creating an accumulation of excess inventory.
What are Constraints?
Constraints are anything that prevents the organization from making progress towards its goal. In manufacturing processes, constraints are often referred to as bottlenecks. Interestingly, constraints can take many forms other than equipment. There are differing opinions on how to best categorize constraints; a common approach is shown in the following:
Physical:
Typically equipment, but can also be other tangible items, such as material shortages, lack of people, or lack of space.
Policy:
Required or recommended ways of working. May be informal (e.g., described to new employees as “how things are done here”). Examples include company procedures (e.g., how lot sizes are calculated, bonus plans, overtime policy), union contracts (e.g., a contract that prohibits cross-training), or government regulations (e.g., mandated breaks).
Paradigm:
Deeply engrained beliefs or habits. For example, the belief that “we must always keep our equipment running to lower the manufacturing cost per piece”. A close relative of the policy constraint.
Market:
Occurs when production capacity exceeds sales (the external marketplace is constraining throughput). If there is an effective ongoing application of the Theory of Constraints, eventually the constraint is likely to move to the marketplace.
In manufacturing plants where a mix of products is produced, it is possible for each product to take a unique manufacturing path and the constraint may “move” depending on the path taken. This environment can be modeled as multiple systems - one for each unique manufacturing path.