Theory of Constraints (TOC)

THE BIG IDEA

Every process has a constraint (bottleneck) and focusing improvement efforts on that constraint is the fastest and most effective path to improved profitability.

What Is the Theory of Constraints?

The Theory of Constraints is a methodology for identifying the most important limiting factor (i.e., constraint) that stands in the way of achieving a goal and then systematically improving that constraint until it is no longer the limiting factor. In manufacturing, the constraint is often referred to as a bottleneck.

The Theory of Constraints takes a scientific approach to improvement. It hypothesizes that every complex system, including manufacturing processes, consists of multiple linked activities, one of which acts as a constraint upon the entire system (i.e., the constraint activity is the “weakest link in the chain”).

So what is the ultimate goal of most manufacturing companies? To make a profit – both in the short term and in the long term. The Theory of Constraints provides a powerful set of tools for helping to achieve that goal, including:

• The Five Focusing Steps: a methodology for identifying and eliminating constraints
• The Thinking Processes: tools for analyzing and resolving problems
• Throughput Accounting: a method for measuring performance and guiding management decisions

Dr. Eliyahu Goldratt conceived the Theory of Constraints (TOC), and introduced it to a wide audience through his bestselling 1984 novel, “The Goal”. Since then, TOC has continued to evolve and develop, and today it is a significant factor within the world of management best practices.

One of the appealing characteristics of the Theory of Constraints is that it inherently prioritizes improvement activities. The top priority is always the current constraint. In environments where there is an urgent need to improve, TOC offers a highly focused methodology for creating rapid improvement.

A successful Theory of Constraints implementation will have the following benefits:

• Increased Profit: the primary goal of TOC for most companies
• Fast Improvement: a result of focusing all attention on one critical area – the system constraint
• Improved Capacity: optimizing the constraint enables more product to be manufactured
• Reduced Lead Times: optimizing the constraint results in smoother and faster product flow
• Reduced Inventory: eliminating bottlenecks means there will be less work-in-process

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Basics of TOC

Core Concept

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.

The Five Focusing Steps are further described in the following table.

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?

Examples of tools that have been formalized as part of the Thinking Processes include:

Throughput Accounting

Throughput Accounting is an alternative accounting methodology that attempts to eliminate harmful distortions introduced from traditional accounting practices – distortions that promote behaviors contrary to the goal of increasing profit in the long term.

In traditional accounting, inventory is an asset (in theory, it can be converted to cash by selling it). This often drives undesirable behavior at companies – manufacturing items that are not truly needed. Accumulating inventory inflates assets and generates a “paper profit” based on inventory that may or may not ever be sold (e.g., due to obsolescence) and that incurs cost as it sits in storage. The Theory of Constraints, on the other hand, considers inventory to be a liability – inventory ties up cash that could be used more productively elsewhere.

In traditional accounting, there is also a very strong emphasis on cutting expenses. The Theory of Constraints, on the other hand, considers cutting expenses to be of much less importance than increasing throughput. Cutting expenses is limited by reaching zero expenses, whereas increasing throughput has no such limitations.

These and other conflicts result in the Theory of Constraints emphasizing Throughput Accounting, which uses as its core measures: Throughput, Investment, and Operating Expense.

In addition, Throughput Accounting has four key derived measures: Net Profit, Return on Investment, Productivity, and Investment Turns.

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.

The Nature of Constraints

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 table.

There are also differing opinions on whether a system can have more than one constraint. The conventional wisdom is that most systems have one constraint, and occasionally a system may have two or three constraints.

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.

Policy Constraints

Policy constraints deserve special mention. It may come as a surprise that the most common form of constraint (by far) is the policy constraint.

Since policy constraints often stem from long-established and widely accepted policies, they can be particularly difficult to identify and even harder to overcome. It is typically much easier for an external party to identify policy constraints, since an external party is less likely to take existing policies for granted.

When a policy constraint is associated with a firmly entrenched paradigm (e.g., “we must always keep our equipment running to lower the manufacturing cost per piece”), a significant investment in training and coaching is likely to be required to change the paradigm and eliminate the constraint.

Policy constraints are not addressed through application of the Five Focusing Steps. Instead, the three questions discussed earlier in the Thinking Processes section are applied:

• What needs to be changed?
• What should it be changed to?
• What actions will cause the change?

The Thinking Processes are designed to effectively work through these questions and resolve conflicts that may arise from changing existing policies.

TOC Example

An excellent way to deepen your understanding of the Theory of Constraints is to walk through a simple implementation example. In this example, the Five Focusing Steps are used to identify and eliminate an equipment constraint (i.e., bottleneck) in the manufacturing process.

Step One – Identify the Constraint

In this step, the manufacturing process is reviewed to identify the constraint. A simple but often effective technique is to literally walk through the manufacturing process looking for indications of the constraint.

The deliverable for this step is the identification of the single piece of equipment that is constraining process throughput.

Step Two – Exploit the Constraint

In this step, the objective is to make the most of what you have – maximize throughput of the constraint using currently available resources. The line between exploiting the constraint (this step) and elevating the constraint (the fourth step) is not always clear. This step focuses on quick wins and rapid relief; leaving more complex and substantive changes for later.

The deliverable for this step is improved utilization of the constraint, which in turn will result in improved throughput for the process. If the actions taken in this step “break” the constraint (i.e., the constraint moves) jump ahead to Step Five. Otherwise, continue to Step Three.

Step Three – Subordinate and Synchronize to the Constraint

In this step, the focus is on non-constraint equipment. The primary objective is to support the needs of the constraint (i.e., subordinate to the constraint). Efficiency of non-constraint equipment is a secondary concern as long as constraint operation is not adversely impacted.

By definition, all non-constraint equipment has some degree of excess capacity. This excess capacity is a virtue, as it enables smoother operation of the constraint. The manufacturing process is purposely unbalanced:

Some useful techniques for this step include:

The deliverable for this step is fewer instances of constraint operation being stopped by upstream or downstream equipment, which in turn results in improved throughput for the process. If the actions taken in this step “break” the constraint (i.e., the constraint moves) jump ahead to Step Five. Otherwise, continue to Step Four.

Step Four – Elevate Performance of the Constraint

In this step, more substantive changes are implemented to “break” the constraint. These changes may necessitate a significant investment of time and/or money (e.g., adding equipment or hiring more staff). The key is to ensure that all such investments are evaluated for effectiveness (preferably using Throughput Accounting metrics).

The deliverable for this step is a significant enough performance improvement to break the constraint (i.e., move the constraint elsewhere).

Step Five – Repeat the Process

In this step, the objective is to ensure that the Five Focusing Steps are not implemented as a one-off improvement project. Instead, they should be implemented as a continuous improvement process.

This step also includes a caution…beware of inertia. Remain vigilant and ensure that improvement is ongoing and continuous. The Five Focusing Steps are kind of like “Whac-A-Mole”…pound one constraint down and then move right on to the next!

Integrating with Lean

Contrasting Theory of Constraints and Lean Manufacturing

The Theory of Constraints and Lean Manufacturing are both systematic methods for improving manufacturing effectiveness. However, they have very different approaches:

• The Theory of Constraints focuses on identifying and removing constraints that limit throughput. Therefore, successful application tends to increase manufacturing capacity.
• Lean Manufacturing focuses on eliminating waste from the manufacturing process. Therefore, successful application tends to reduce manufacturing costs.

Both methodologies have a strong customer focus and are capable of transforming companies to be faster, stronger, and more agile. Nonetheless, there are significant differences, as highlighted in the following table.

From the perspective of the Theory of Constraints, it is more practical and less expensive to maintain a degree of excess capacity for non-constraints (i.e., an intentionally unbalanced line) than to try to eliminate all sources of variation (which is necessary to efficiently operate a balanced line). Eliminating variation is still desirable in TOC; it is simply given less attention than improving throughput.

Combining Theory of Constraints and Lean Manufacturing

One of the most powerful aspects of the Theory of Constraints is its laser-like focus on improving the constraint. While Lean Manufacturing can be focused, more typically it is implemented as a broad-spectrum tool.

In the real world, there is always a need to compromise, since all companies have finite resources. Not every aspect of every process is truly worth optimizing, and not all waste is truly worth eliminating. In this light, the Theory of Constraints can serve as a highly effective mechanism for prioritizing improvement projects, while Lean Manufacturing can provide a rich toolbox of improvement techniques. The result – manufacturing effectiveness is significantly increased by eliminating waste from the parts of the system that are the largest constraints on opportunity and profitability.

While Lean Manufacturing tools and techniques are primarily applied to the constraint, they can also be applied to equipment that is subordinated to the constraint (e.g., to equipment that starves or blocks the constraint; to post-constraint equipment that causes quality losses).

The remainder of this section describes how to apply a range of Lean Manufacturing tools and techniques to the Five Focusing Steps.

Applying Lean Tools to “Identify the Constraint”

Lean Manufacturing provides an excellent tool for visually mapping the flow of production (Value Stream Mapping) as well as a philosophy that promotes spending time on the plant floor (Gemba).

Applying Lean Tools to “Exploit the Constraint”

Lean Manufacturing strongly supports the idea of making the most of what you have, which is also the underlying theme for exploiting the constraint. For example, lean teaches to organize the work area (5S), to motivate and empower employees (Visual Factory/Andon), to capture best practices (Standardized Work), and to brainstorm incremental ideas for improvement (Kaizen).

Applying Lean Tools to “Subordinate to the Constraint”

Lean Manufacturing techniques for regulating flow (Kanban) and synchronizing automated lines (Line Control) can be applied towards subordinating and synchronizing to the constraint.

Applying Lean Tools to “Elevate the Constraint”

Lean Manufacturing techniques for proactively maintaining equipment (TPM), dramatically reducing changeover times (SMED), building defect detection and prevention into production processes (Poka-Yoke), and partially automating equipment (Jidoka) all have direct application when elevating the constraint. TPM and SMED can also be viewed as exploitation techniques (maximizing throughput using currently available resources); however, they are fairly complex and are likely to benefit from working with outside experts.