Theory of Constraints

Theory of Constraints (TOC) is an overall management philosophy introduced by Dr. Eliyahu M. Goldratt in 1984 that is geared to help organizations continually achieve their goal. Also it is a body of knowledge which helps in understanding the way a system functions and identifies those elements which constrain the system from achieving its goals. There are no systems in this world with unconstrained ability to achieve continuous growth. In the context of business systems where finite goals are sought to be achieved by an organization, TOC helps us understand what constraints the business from achieving its goals. This helps optimize resource deployment to the right areas so that the goals are achieved with minimum inputs. TOC has been widely applied in production and operations management and in logistics. Where constraints are easily identifiable and definable. They have thus become a tremendous success in operations and production management. However TOCs relevance and importance stretches beyond clear and quantifiable parts of management. Every system consists of different elements with different characteristics. Each element would have different capacities and efficiency levels to perform a certain function. The goal is achieved only if all the elements in the systems work in co-ordination producing the optimum result. Five Focusing Steps (5FS) The TOC process seeks to identify the constraint and restructure the rest of the organization around it, through the use of the Five Focusing Steps. These are the "process of ongoing improvement" (POOGI) steps for identifying, exploiting and managing the system's constraints, whether the system is manufacturing, distribution, sales, or project management.

1) Identify the system's constraint(s). 2) Decide how to exploit the constraint(s). 3) Subordinate everything else to the above decision. 4) Elevate the constraint. 5) If, in any of the above steps, the constraint has been broken, go back to Step 1. The 0th step is to agree on the goal of the system and choose global measures of progress towards it. The process appears simple, yet to clear off the cobwebs of entrenched existing thinking and adapting to TOC takes much more than just pure concepts but hard nosed application of these concepts and right measures to evaluate their effectiveness. The goal of any organization is to make money and it makes money by selling products and services to customers. The three key measures for estimating weather the goals are achieved are as given below. 1) Throughput - The rate at which the system generates money through sales. This is considered to be the same as Contribution Margin (selling price -- cost of raw materials). Labor costs are considered to be part of Operating Expense rather than throughput. 2) Inventory - All the money the system invests in things it intends to (or could) sell. This is the total system investment, which includes not only conventional inventory, but also buildings, land, vehicles, plant, and equipment. It does not include the value of labor added to Work-In-Process inventory. 3) Operating expenses - All the money the system spends in turning Inventory into Throughput. This includes all of the money constantly poured into a system to keep it operating, such as heat, light, scrap materials, depreciation, etc.