INTRODUCTION Today, more than ever, change is essential to satisfying expectations.

Customers expect higher product and service quality than the price theyre willing to pay to acquire those products and services. More than ever, employees expect security in their jobs. Shareholders expect that todays investments will yield a higher rate of return over a shorter timeframe. Yet, to make ends meet, management is constantly pressured to keep costs under control. In light of todays competitive pressures and a rapidly changing environment, to not change is to give way to ones competitors. Hence, we should understand that to improve means to change. We know that to improve means we must: Provide products and services that solve customers problems Release products and services consistent with market demand Reduce variability in our processes Have measurements that indicate success relative to achieving our goal

 Reward people for their contribution to change Rather than reacting to external change, or being subjected to random internal change, many organizations have concluded that a process of on-going improvement is an absolute necessity. For an organization to have a process of ongoing improvement, certain basic questions need to be answered faster and more effectively. Those fundamental questions are: What To Change? What To Change To? How To Cause The Change? The Theory of Constraints is a set of holistic processes and insights, all based on a systems approach that simplifies the improving and managing of complex organizations by focusing on the few physical and logical constraining leverage points. Furthermore, it provides a tool set to build and implement the levers (holistic rules) that synchronize the parts to achieve an order of magnitude improvement in the performance of the system as a whole. The crucial insight of the Theory of Constraints is that only a few elements (constraints) in a business control the results of the entire organization. Theory of Constraints tools identify these constraints, and focus the entire organization on simple, effective solutions to problems that seemed insurmountably complex and unsolvable. The theory of constraints has three underlying assumptions: Convergence - Inherent Simplicity; The more complex a system is to describe, the simpler it is to manage. Consistency - There are no conflicts in nature; If two interpretations of a natural phenomenon are in conflict, one or possibly both must be wrong Respect - People are not stupid; Even when people do things that seem stupid they have a reason for that behavior Eliyahu Goldratt originated the idea in his book The Goal as a way of managing organizations to increase profits. The Theory of Constraints is a proven method that can be used by existing personnel to increase throughput (sales), reliability,

and quality while decreasing inventory, WIP, late deliveries, and overtime. Successful organizations also adopt the Theory of Constraints to help make tactical & strategic decisions for continuous improvement. The Theory of Constraints is not just a tool to manage bottlenecks. In fact, the scope of tools and breadth of application of Theory of Constraints is substantial.

The theory of constraints (TOC) is an overall management philosophy introduced by Eliyahu M. Goldratt in his 1984 [1] book titled The Goal, that is geared to help organizations continually achieve their goals. Goldratt adopted the concept with his book Critical Chain, published 1997. The concept was extended to TOC with respectively titled publication in 1999. An earlier propagator of the concept was Wolfgang Mewes in Germany with publications on power-oriented management theory (Machtorientierte Fhrungstheorie, 1963) and following with hisEnergo-Kybernetic System (EKS, [3] 1971), later renamed Engpasskonzentrierte Strategie as a more advanced theory of bottlenecks. The publications of Wolfgang Mewes are marketed through the FAZ Verlag, publishing house of the German newspaper Frankfurter Allgemeine Zeitung. However, the paradigm Theory of constraints was first used by Goldratt. [edit]Key
[2]

assumption

The underlying premise of theory of constraints is that organizations can be measured and controlled by variations on three measures: throughput, operational expense, and inventory. Throughput is the rate at which the system generates money through sales. Inventory is all the money that the system has invested in purchasing things which it [4] intends to sell. Operational expense is all the money the system spends in order to turn inventory into throughput. Before the goal itself can be reached, Necessary Conditions must first be met. This typically includes safety, quality, legal obligations, etc. For most businesses, the goal itself is to make money. However, for many organizations and non-profit businesses, making money is a necessary condition for pursuing the goal. Whether it is the goal or a necessary condition, understanding how to make sound financial decisions based on throughput, inventory, and [4] operating expense is a critical requirement. [edit]The

five focusing steps

Theory of constraints is based on the premise that the rate of goal achievement by a goal-oriented system (i.e., the system's throughput) is limited by at least one constraint. The argument by reductio ad absurdum is as follows: If there was nothing preventing a system from achieving higher throughput (i.e., more goal units in a unit of time), its throughput would be infinite which is impossible in a real-life system. Only by increasing flow through the constraint can overall throughput be increased.
[1]

Assuming the goal of a system has been articulated and its measurements defined, the steps are: 1. Identify the system's constraint(s) (that which prevents the organization from obtaining more of the goal in a unit of time) 2. Decide how to exploit the system's constraint(s) (how to get the most out of the constraint) 3. Subordinate everything else to above decision (align the whole system or organization to support the decision made above) 4. Elevate the system's constraint(s) (make other major changes needed to break the constraint)

5. Warning!!!! If in the previous steps a constraint has been broken, go back to step 1, but do not [5] allow inertia to cause a system's constraint. The goal of a commercial organization is: "Make money now and in the future"), and its measurements are given by throughput accounting as: throughput, investment, and operating expenses. The five focusing steps aim to ensure ongoing improvement efforts are centered around the organization's constraint(s). In the TOC literature, this is referred to as the ''process of ongoing improvement(POOGI). These focusing steps are the key steps to developing the specific applications mentioned below. [edit]Constraints A constraint is anything that prevents the system from achieving more of its goal. There are many ways that constraints can show up, but a core principle within TOC is that there are not tens or hundreds of constraints. There is at least one and at most a few in any given system. Constraints can be internal or external to the system. An internal constraint is in evidence when the market demands more from the system than it can deliver. If this is the case, then the focus of the organization should be on discovering that constraint and following the five focusing steps to open it up (and potentially remove it). An external constraint exists when the system can produce more than the market will bear. If this is the case, then the organization should focus on mechanisms to create more demand for its products or services. Types of (internal) constraints

Equipment: The way equipment is currently used limits the ability of the system to produce more salable goods/services. People: Lack of skilled people limits the system. Mental models held by people can cause behaviour that becomes a constraint. Policy: A written or unwritten policy prevents the system from making more.

The concept of the constraint in Theory of Constraints differs from the constraint that shows up in mathematical optimization. In TOC, the constraint is used as a focusing mechanism for management of the system. In optimization, the constraint is written into the mathematical expressions to limit the scope of the solution (X can be no greater than 5). Please note: organizations have many problems with equipment, people, policies, etc. (A breakdown is just that a breakdown and is not a constraint in the true sense of the TOC concept) The constraint is the thing that is preventing the organization from getting more throughput (typically, revenue through sales). [edit]Buffers Buffers are used throughout the theory of constraints. They often result as part of the exploit and subordinate steps of the five focusing steps. Buffers are placed before the governing constraint, thus ensuring that the constraint is never starved. Buffers are also placed behind the constraint to prevent downstream failure to block the constraint's output. Buffers used in this way protect the constraint from variations in the rest of the system and should allow for normal variation of processing time and the occasional upset (Murphy) before and behind the constraint. Buffers can be a bank of physical objects before a work center, waiting to be processed by that work center. Buffers ultimately buy you time, as in the time before work reaches the constraint and are often verbalized as time buffers. There should always be enough (but not excessive) work in the time queue before the constraint and adequate offloading space behind the constraint. Buffers are not the small queue of work that sits before every work center in a Kanban system although it is similar if you regard the assembly line as the governing constraint. A prerequisite in the theory is that with one constraint in the system, all other parts of the system must have sufficient capacity to keep up with the work at the constraint and to catch up if time was lost. In a balanced line, as espoused by Kanban, when one work center goes down for a period

longer than the buffer allows, then the entire system must wait until that work center is restored. In a TOC system, the only situation where work is in danger, is if the constraint is unable to process (either due to malfunction, sickness or a "hole" in the buffer if something goes wrong that the time buffer can not protect). Buffer management therefore represents a crucial attribute of the theory of constraints. There are many ways to do it, but the most often used is a visual system of designating the buffer in three colours: green (okay), yellow (caution) and red (action required). Creating this kind of visibility enables the system as a whole to align and thus subordinate to the need of the constraint in a holistic manner. This can also be done daily in a central operations room that is accessible to everybody. [edit]Plant

types

There are four primary types of plants in the TOC lexicon. Draw the flow of material from the bottom of a page to the top, and you get the four types. They specify the general flow of materials through a system, and they provide some hints about where to look for typical problems. The four types can be combined in many ways in larger facilities.

I-plant: Material flows in a sequence, such as in an assembly line. The primary work is done in a straight sequence of events (one-to-one). The constraint is the slowest operation. A-plant: The general flow of material is many-to-one, such as in a plant where many sub-assemblies converge for a final assembly. The primary problem in A-plants is in synchronizing the converging lines so that each supplies the final assembly point at the right time. V-plant: The general flow of material is one-to-many, such as a plant that takes one raw material and can make many final products. Classic examples are meat rendering plants or a steel manufacturer. The primary problem in V-plants is "robbing" where one operation (A) immediately after a diverging point "steals" materials meant for the other operation (B). Once the material has been processed by A, it cannot come back and be run through B without significant rework. T-plant: The general flow is that of an I-plant (or has multiple lines), which then splits into many assemblies (many-to-many). Most manufactured parts are used in multiple assemblies and nearly all assemblies use multiple parts. Customized devices, such as computers, are good examples. T-plants suffer from both synchronization problems of A-plants (parts aren't all available for an assembly) and the robbing problems of Vplants (one assembly steals parts that could have been used in another).

For non-material systems, one can draw the flow of work or the flow of processes and arrive at similar basic structures. A project, for example is an A-shaped sequence of work, culminating in a delivered project. [edit]Applications The focusing steps, this process of ongoing improvement, have been applied to manufacturing, project management, supply chain/distribution generated specific solutions. Other tools (mainly the "thinking process") also led to TOC applications in the fields of marketing and sales, and finance. The solution as applied to each of these areas are listed below. [edit]Operations Within manufacturing operations and operations management, the solution seeks to pull materials through the [6] system, rather than push them into the system. The primary methodology use is drum-buffer-rope (DBR) and a [7] variation called simplified drum-buffer-rope (S-DBR). Drum-buffer-rope is a manufacturing execution methodology, named for its three components. The drum is the physical constraint of the plant: the work center or machine or operation that limits the ability of the entire system to produce more. The rest of the plant follows the beat of the drum. They make sure the drum has work and that anything the drum has processed does not get wasted.

The buffer protects the drum, so that it always has work flowing to it. Buffers in DBR have time as their unit of measure, rather than quantity of material. This makes the priority system operate strictly based on the time an order is expected to be at the drum. Traditional DBR usually calls for buffers at several points in the system: the constraint, synchronization points and at shipping. S-DBR has a buffer at shipping and manages the flow of work across the drum through a load planning mechanism. The rope is the work release mechanism for the plant. Orders are released to the shop floor at one "buffer time" before they are due. In other words, if the buffer is 5 days, the order is released 5 days before it is due at the constraint. Putting work into the system earlier than this buffer time is likely to generate too-high work-in-process and slow down the entire system. [edit]Supply

chain / logistics

In general, the solution for supply chains is to create flow of inventory so as to ensure greater availability and to eliminate surpluses. The TOC distribution solution is effective when used to address a single link in the supply chain and more so across the entire system, even if that system comprises many different companies. The purpose of the TOC distribution solution is to establish a decisive competitive edge based on extraordinary availability by dramatically reducing the damages caused when the flow of goods is interrupted by shortages and surpluses. This approach uses several new rules to protect availability with less inventory than is conventionally required. Before explaining these new rules, the term Replenishment Time must be defined. Replenishment Time (RT) is the sum of the delay, after the first consumption following a delivery, before an order is placed plus the delay after the order is placed until the ordered goods arrive at the ordering location. 1. Inventory is held at an aggregation point(s) as close as possible to the source. This approach ensures smoothed demand at the aggregation point, requiring proportionally less inventory. The distribution centers holding the aggregated stock are able to ship goods downstream to the next link in the supply chain much more quickly than a make-to-order manufacturer can. #:Following this rule may result in a make-to-order manufacturer converting to make-to-stock. The inventory added at the aggregation point is significantly less than the inventory reduction downstream. 2. In all stocking locations, initial inventory buffers are set which effectively create an upper limit of the inventory at that location. The buffer size is equal to the maximum expected consumption within the average RT, plus additional stock to protect in case a delivery is late. In other words, there is no advantage in holding more inventory in a location than the amount that might be consumed before more could be ordered and received. Typically, the sum of the on hand value of such buffers are 2575% less than currently observed average inventory levels. 3. Once buffers have been established, no replenishment orders are placed as long as the quantity inbound (already ordered but not yet received) plus the quantity on hand are equal to or greater than the buffer size. Following this rule causes surplus inventory to be bled off as it is consumed. 4. For any reason, when on hand plus inbound inventory is less than the buffer, orders are placed as soon as practical to increase the inbound inventory so that the relationship On Hand + Inbound = Buffer is maintained. 5. To ensure buffers remain correctly sized even with changes in the rates of demand and replenishment, a simple recursive algorithm called Buffer Management is used. When the on hand inventory level is in the upper third of the buffer for a full RT, the buffer is reduced by one third (and dont forget rule 3). Alternatively, when the on hand inventory is in the bottom one third of the buffer for too long, the buffer is increased by one third (and dont forget rule 4). The definition of too long may be changed depending on required service levels, however, a general rule of thumb is 20% of the RT. Moving buffers up more readily than down is supported by the usually greater damage caused by shortages as compared to the damage caused by surpluses.

Once inventory is managed as described above, continuous efforts should be undertaken to reduce RT, late deliveries, supplier minimum order quantities (both per SKU and per order) and customer order batching. Any improvements in these areas will automatically improve both availability and inventory turns, thanks to the adaptive nature of Buffer Management. A stocking location that manages inventory according to the TOC should help a non-TOC customer (downstream link in a supply chain, whether internal or external) manage their inventory according to the TOC process. This type of help can take the form of a vendor managed inventory (VMI). The TOC distribution link simply extends its buffer sizing and management techniques to its customers inventories. Doing so has the effect of smoothing the demand from the customer and reducing order sizes per SKU. VMI results in better availability and inventory turns for both supplier and customer. More than that, the benefits to the non-TOC customers are sufficient to meet the purpose of capitalizing on the decisive competitive edge by giving the customer a powerful reason to be more loyal and give more business to the upstream link. When the end consumers buy more the whole supply chain sells more. One caveat should be considered. Initially and only temporarily, the supply chain or a specific link may sell less as the surplus inventory in the system is sold. However, the immediate sales lift due to improved availability is a countervailing factor. The current levels of surpluses and shortages make each case different. [edit]Finance

and accounting

The solution for finance and accounting is to apply holistic thinking to the finance application. This has been [8] termed throughput accounting. Throughput accounting suggests that one examine the impact of investments and operational changes in terms of the impact on the throughput of the business. It is an alternative to cost accounting. The primary measures for a TOC view of finance and accounting are: throughput, operating expense and investment. Throughput is calculated from sales minus totally variable cost. Totally variable cost is usually calculated as the cost of raw materials that go into creating the item sold. [edit]Project

management
[9]

Critical Chain Project Management (CCPM) is utilized in this area. CCPM is based on the idea that all projects look like A-plants: all activities converge to a final deliverable. As such, to protect the project, there must be internal buffers to protect synchronization points and a final project buffer to protect the overall project. [edit]Marketing

and sales

While originally focused on manufacturing and logistics, TOC has expanded lately into sales management and [10] marketing. Its role is explicitly acknowledged in the field of sales process engineering. For effective sales management one can apply Drum Buffer Rope to the sales process similar to the way it is applied to operations (see Reengineering the Sales Process book reference below). This technique is appropriate when your constraint is in the sales process itself or you just want an effective sales management technique and includes the topics of funnel [citation needed] management and conversion rates. [edit]The

TOC thinking processes

Main article: Thinking Processes (Theory of Constraints) The thinking processes are a set of tools to help managers walk through the steps of initiating and implementing a project. When used in a logical flow, the Thinking Processes help walk through a buy-in process: 1. Gain agreement on the problem 2. Gain agreement on the direction for a solution 3. Gain agreement that the solution solves the problem 4. Agree to overcome any potential negative ramifications 5. Agree to overcome any obstacles to implementation

TOC practitioners sometimes refer to these in the negative as working through layers of resistance to a change. Recently, the current reality tree (CRT) and future reality tree (FRT) have been applied to an argumentative academic [11] paper. [edit]Development

and practice

TOC was initiated by Goldratt, who until his recent death was still the main driving force behind the development and practice of TOC. There is a network of individuals and small companies loosely coupled as practitioners around the world. TOC is sometimes referred to as "constraint management". TOC is a large body of knowledge with a strong guiding philosophy of growth.

THE FIVE FOCUSING STEPS OF TOC How can any generic solution have such broad applicability? It turns out that no matter what an organizations offering is products and/or services the methods for most effectively and efficiently managing processes and resources are basically the same. To use another powerful analogy: just as the strength of a chain is dictated by its weakest link, the performance of any value-chain is dictated by its constraint. Recognizing this, the resulting steps to maximizing the performance of a value-chain are: 1. Identify the constraint. 2. Decide how to exploit the constraint. 3. Subordinate and synchronize everything else to the above decisions. To improve the performance of that same value-chain, continue: 4. Elevate the performance of the constraint. 5. If in any of the above steps the constraint has shifted, go back to Step WARNING DO NOT LET INERTIA BECOME THE SYSTEMS CONSTRAINT These are called the 5 Steps of TOC and provide the foundation for many of TOCs generic solutions, which include, the management of processes, inventory, supply chains, product development and projects (single and multiple), personnel, and decision-making. Although the 5 Steps of TOC can be applied to every process at every level in an organization, which is how TOC is frequently often implemented, the

true power - and results - comes from: Understanding the interdependencies between and across processes that contribute to delivering a product or service, Understanding the impact that those interdependencies and normal variability have on their combined, overall performance, and Appropriately buffering for interdependencies and normal variability so that that performance can be predictably and consistently high. Market Demand-Pull AGIs TOC Supply Chain Management Solution For supply chain, plant operationsand distribution managers who are dealing with the challenges of ensuring availability of the right products at the right place and time while maintaining profitable operations, the TOC Supply Chain Solution enables the organization to: Rapidly respond to actual market demand Improve on-time deliveries Reduce the need for overtime and expediting Better utilize capacity to meet customer expectations TOC Project Management Solution For organizations and project managers who are working to improve theirability to continually meet the three seemingly illusive project commitments budget, time and content, the TOC Project Management Solution provides a comprehensive tool set that addresses: The nature of project planning Project scheduling Resource behavior Project visibility and control Multiple project synchronization 10 Understanding these three points allows the 5 Steps of TOC to be much more than simply another methodology for managing processes, but in fact, to be a methodology for consistently and significantly increasing the overall performance of systems.

The 5 Steps of TOC implemented in this context enables an organization to create a stable and reliable value delivery system from which its leadership can quickly respond to any opportunity that presents itself. The TOC Thinking Processes enable it to develop strategies to seize those opportunities in a way that result in significant strategic advantage and value to all stakeholders