Theory of Constraints

Type

Method of organizing production

Origin

Israel, Eliyahu Goldratt

Objective

Profit improvement by increasing  throughput while minimizing inventory and operating expense

Focus

Strengthen the weakest links.

Most businesses can be viewed as a linked set of processes that transform inputs into saleable outputs.

"A chain is only as strong as its weakest link."

Strategy

Most organizations have very few true constraints.
Focus only needs to be on the constraints.

Steps

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 ConstraintChange agent 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 ElseThe 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 OneBut beware of "Inertia"

How to?

1. Determining Where to Begin
   TOC advocates beginning with the constraint that most limits Throughput. This should create substantial improvements to the value stream in a short time, which is beneficial for igniting the required employee momentum and support.
2. Performance measuresReplace traditional financial metrics of asset utilization and burden absorption with Goldratt’s Throughput, Inventory, and Operating Expense

Metrics

replace all traditional measures derived from the "product cost" accounting paradigm

• 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
  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 ExpenseThe 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

All improvement opportunities should be prioritized by their effect on the three measures, especially Throughput, for which the only limit on how high it can be increased is market size.