Theory of constraints (TOC)
Definition and explanation of the concept
A constraint is a factor or an element that limits our ability to get more of what we want. We can easily find many examples of constraints in our daily life. For example, if Karen does not have enough time to study thoroughly for every subject of her semester syllabus and go out with her friends on weekend, the time is the constraint of Karen.
The constraints are frequently encountered in business processes where they are usually referred to as weak links or limiting factors. The theory of constraints (TOC) states that every process or operation in a business consists of a series of interrelated activities and amongst those activities lies a weak link or limiting factor that hinders the output of the whole process. Hence, the business organizations and individuals can optimize or improve their business processes by focusing their attention on managing, improving or optimizing the performance of those weak links or limiting factors.
The theory of constraints refers to the fact that every process in a manufacturing or services business consists of a sequence of interlinked activities. The optimization of the performance of a process as a whole requires that every link in the sequence must serve its purpose as proficiently as possible. Here, the theory of constraints postulates that amongst all those links there is at least one weak link that acts as a limiting factor and restricts the output efficiency of the whole process. In order to optimize or improve the performance of the process, the business must focus its efforts to manage the limiting factor in the process.
The concept of managing constraints in business processes was first floated in 1984 by an Israeli author Mr. Eliyahu M. Goldratt in his famous book ‘The Goal’. Basically, the idea proposed in the theory is that if the effective management of weak links or limiting factors is undertaken, the overall performance of any business process could be enhanced which may result in improved production of goods and services, increased revenues and higher return on investment.
The theory of constraints is sometimes referred to as the bottleneck approach because the limiting factor acts as a bottleneck within a process. The neck of a bottle determines the flow of liquid from a bottle, no matter what the actual size of the bottle is. Similarly, the functioning capabilities of a limiting factor in the process determines the production or output efficiency of the whole process, no matter how much efficient other activities in the process are. A process is as efficient as its weakest link. Therefore, we can say that focusing attention on performance of the weakest link in the process would provide the greatest benefit to an organization.
Basic assumptions and tools:
The basic assumptions of the theory of constraints relies upon following three variables:
- Inventory: All the money of the business is stuck or invested in the form of inventory and company could only make profits by selling them.
- Expenses: These include the operational expenses that a business spends to convert the inventory into finished products.
- Throughput: It is the maximum possible output or production.
The throughput accounting, contrary to orthodox accounting practices, focuses upon the improvement of profit, return on investment and revenues by keeping in view the bottlenecks of the system. So, it is not restricted by any emphasis on cost-cutting, rather upon the contribution of the constraints towards profitability.
The five focusing steps
The theory of constraints presents a well established scientific method comprised of a continuous stream of five steps that specifically focus upon the identification and elimination of the constraints that limit a process from achieving its maximum capability:
- Identification of the constraint: In this step constraint or bottleneck in the system is identified.
- Optimization of the constraint: The constraint is exploited to its maximum outcome in its present state.
- Subordination of other activities: All the other activities present in the system are set to match the needs of the constraint.
- Elevation of the constraint: This step involves the enhancement of current capacity of the constraint. This step consumes both time as well as money resources.
- Process Repetition: The fifth step is not actually a step in itself, rather it is a repetition of the above mentioned four steps. This is because when a constraint is removed from a system, it moves somewhere else within the system (i.e., another constraint within the process is found and eliminated using first four steps).
Thinking Process Framework:
This process demands the user to search for three questions in a system.
- What do you need to change?
- What the change should be?
- What actions will bring the change?
Examples of the application of theory of constraints (TOC):
The theory of constraints (TOC) is a very practical theory and has its implication worldwide. Both small and large multinational companies widely use it to recognize and rectify the vulnerabilities of their systems or processes. One example is the Boeing Company – a multi-national company that manufactures and sells aircrafts world wide. Boeing implemented the theory into its Aerospace Segment in 1996. The results they achieved were the lead time of their supplies was improved by 75% and inventory decrease reduced by 60%.
Another example of the practical implementation of the theory of constraints is by the manufacturers of Ford. Ford Motor Company is an American company of automobiles. They applied the Drum Buffer Rope (DBR) system of theory of constraints in 1991, which states that in every manufacturing plant there are some resources that are available in a limited amount due to which the overall production of that plant is restricted. Ford used the model of just in time (JIT) before implementing theory of constraints (TOC), which was implemented to develop on gains already made due to JIT model. The industry segment was ‘automotive’. They got very favorable results as the inventory decrease reduced by almost 100 million dollars (which was 50% of the overall inventory), the lead time was improved by 3 days and the return on investments was increased by 20%.
Advantages and disadvantages
The main benefits or advantages that a business can derive from the application of theory of constraints are given below:
- The theory of constraints is simple and easy to understand. This makes it more practical for the managers of the business.
- The approach advocated by the theory provides a smooth pattern to follow which enables the user to focus on an area that actually needs attention.
- The theory is very effective in dynamic business environments as by removing or minimizing the limiting factor in a process, quick results can be achieved.
- The theory of constraints results in an immediate improvement in the efficiency of the relevant process and increase in the profits of the business. The very reason for this is that the main focus of the theory is to optimize the constraints present in the systems, which ultimately decreases the time to provide a service (in a service organization) and decreases production time and lead time etc. (in a manufacturing process) which increases the number of finished goods produced.
- The implementation of the theory can result in reduction of many costs like labor, overtime, inbound or outbound logistics etc. as it restructures the overall process of a business.
Some limitations or disadvantages of the theory of constraints have been discussed below:
- The approach provided by the theory of constraints is ongoing which may become hard to maintain. This is because the implementation of this theory demands changes in the processes of the business which may become challenging to sustain in the long run.
- When the company deals with a specific constraint in a system, another constraint develops, so it becomes difficult and sometime impossible to obtain an optimum level of all activities.
- The determination of the constraint in the first place is a major challenge for a business. Even if the business pinpoints a constraint it may be the case that that specific constraint is driven by another hidden constraint.
- Although the theory of constraints works very effectively in the real life situations faced by business organizations yet the effects of this theory are short-term. In some business, the theory pays heed to improving a process in the real time but it may be the case that the constraint upon which the business focuses its attention is a temporary one and thus cannot produce long lasting benefits.
- There may be many constraints that cannot be controlled by the business. For example, if any constraint is driven by one or more market forces like supply, demand and market share, the implementation of the theory of constraints becomes difficult or irrelevant.
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