Theory of Constraints

The Theory of Constraints (TOC) is a management paradigm that views any manageable system as being limited in achieving more of its goals by a very small number of constraints. There is always at least one constraint, and TOC uses a focusing process to identify the constraint and restructure the rest of the organization around it.

TOC adopts the common idiom “a chain is no stronger than its weakest link”. This means that processes, organizations, etc., are vulnerable because the weakest person or part can always damage or break them or at least adversely affect the outcome.

The theory of constraints (TOC) is an overall management philosophy introduced by Eliyahu M. Goldratt in his 1984 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 Führungstheorie, 1963) and following with his Energo-Kybernetic System (EKS, 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.

Organizations are Complex

Organizations are a complex web of people, equipment, methods, materials and measures. This detail complexity is bad enough. Then add to it the dynamic complexity of changing customers, suppliers, workforce, regulations, etc. and you have a picture of the challenge faced by today’s management team.

Traditional Management Methods

Traditionally, management has divided the organization into smaller, more manageable pieces. The objective is to maximize the performance of each part. The global improvement is assumed to be equal to the sum of the local improvements. Right?

The Theory of Constraints

No, wrong! TOC claims that a change to most of the variables in an organization will have only a small impact on the global performance – on the bottom line. By trying to improve everything everywhere, the risk is that nothing will be improved that really counts. Why? Because if only a few key variables in any system influence overall system performance at any given time, trying to improve most of the system will be counterproductive.

Theory of Constraints provides a set of holistic processes and rules, all based on a systems approach that exploits the inherent simplicity within complex systems through focusing on the few variables – called Constraints – as a way to synchronize the parts to achieve ongoing improvement in the performance of the system as a whole.

Goldratt likens systems to chains, or to networks of chains. Like a chain, a system is only as strong as its weakest link.

An interesting phenomenon about chains is that strengthening any link except the weakest one does not improve the strength of the whole chain. Strengthening the weakest link produces an immediate increase in the strength of the whole chain — but only up to the level of the next weakest link.

Similarly, in business systems, it is usually the capacity of one element that determines the overall performance of the business, and striving to improve any aspect of the system other than that constraint won’t do anything.

The TOC Process

A company must first know its goal and the necessary conditions for achievement. Then it has to follow the “Process Of Ongoing Improvement (POOGI)” to identify, exploit and perhaps elevate the Constraint(s) in a continuous way:

  1. Identify (choose) the system’s constraint.
  2. Decide how to exploit the system’s constraint.
  3. Subordinate everything else to the above decision.
  4. (Evaluate various alternatives to) Elevate the system’s constraint.
  5. If the constraint is broken go back to step 1, but do not allow inertia to cause the system’s constraint.

The Main Types of Constraints of a Commercial System

  • Capacity Constraint: A resource which cannot provide timely capacity as demanded by the system.
  • Market Constraint: The amount of customers’ orders is not sufficient to sustain the required growth of the system.
  • Time Constraint: The response time of the system to the requirement of the market is too long to the extent that it jeopardizes the system’s ability to meet its current commitment to its customers as well as the ability of winning new business.

TOC Solution Areas

  • Operation (production) management – Make to Order (MTO) environment and Make to Availability (MTA)
  • Project Management – CCPM – Critical Chain Project Management
  • Distribution & Supply Chain Management – DTA – Distribute to Availability
  • Finance & Measurements – Throughput Accounting
  • Sales Management
  • Marketing – Development of Market Offers
  • Managing People – Management Tools (MT)
  • Strategy & Tactics – How to develop a company-wide improvement plan
  • Thinking Processes – Everything within a system is connected by cause and effect relationships. Identification of the causes leads us to the core problem/contradiction/conflict and this is the level for sustainable solutions. The use of cause and effect relationships helps us to structure our thinking, log our analysis and understand the suggested solution for any problem. The TOC – thinking processes provides a set of tools in doing so.

Useful resources about the Theory of Constraints

  • Manufacturing Environments – Source: “The Goal” by Goldratt
  • Distribution and Supply Chain – Source: “Isn’t it obvious” by Goldratt
  • Applied Thinking Processes in Software Development – Source: “Necessary But Not Sufficient” by Goldratt
  • Project Management – Source: “Critical Chain” by Goldratt
  • Marketing – Source: “It’s not Luck” by Goldratt
  • Theoretical Treatment – Source: “Theory of Constraints” by Goldratt
Business frameworks like Theory of Constraints are invaluable to evaluating and analyzing various business problems. You can download business frameworks developed by management consultants and other business professionals at Flevy here.

Receive our FREE Strategy Development Deck

This is a discussion deck template for a corporate strategy development session. In this discussion, we go through a 2-prong approach to growth and evaluate the merits of various growth drivers. This same document is available for purchase on Flevy here.
Have you used Theory of Constraints in your work? Please share your experiences and insights in the comments section below.

, , ,

© 2018, Marketing Mix Hub