Theory of Constraints (TOC) is a management philosophy and an approach in determining the limiting factor in the flow of any system, and developing solutions to overcome these limitations to reach the milestones in a way that will achieve the buy-in of the all the key stakeholders.
A for-profit organization typically will have three goals of making money, having customer satisfaction and having satisfied employees. Among these, the most measurable is making money. In case of a hospital, the focus is on having healthy patients.
However what is common to both these disparate systems is a flow that needs to be managed to achieve the goal. There is a flow of work in a commercial enterprise focusing on projects while in a hospital there is a flow of people. Similarly, for a manufacturing organization, there is a flow of products to be managed.
TOC as a body of knowledge has seen significant development and expansion over the last two decades. There are three broad components that make up the body of knowledge. These are:
Five Focusing Steps
Throughput Accounting
Thinking Process
Five Focusing Steps
Normally in organizations, it appears that there are many aspects that are constraining the flow. A careful analysis will indicate that there are a few (many times just a single) points that constrain the flow. A firm belief in TOC is that there are only a very few points constraint the flow in any system and a solution can be created to significantly impact the flow. The steps are as follows:
1.Identify the System's Constraint(s) 2. Decide how to Exploit the System's Constraint(s) 3.Subordinate everything else to the above decision 4.Elevate the System's Constraint(s) 5. Maintain progressive equilibrium
Throughput Accounting
This deals with defining the goals and measures needed to succeed in the new paradigm. The three TOC measurements are:
Throughput (T) = The rate at which the organization generates goal units. E.g. For-profit organizations Throughput is money
Operating Expenses (OE) = All the money an organization spends in generating the goal units. For all organizations, Operating expenses is money.
Operating expenses = the money an organization constantly pays, even if production were to stop for a while e.g. rent, salaries, insurance, etc
Investment (I) = All the money tied up in the organization E.g. buildings, plant and machinery, finished goods, raw material, receivables, etc
In order to make money, many of the decisions will have to be looked from a throughput world. The following examples give a sense of the differences between the traditional paradigm and the suggested paradigm.
DECISION
TRADITIONAL (COST) PARADIGM
THROUGHPUT PARADIGM
Investment in a faster machine
Cost of new equipment = Rs 2 Lakh Time saved per part = 5 min No of parts needed in a year = 60000 Direct Labour Cost = Rs 8 per hour Overhead factor = 2 Cost saved per hour = 8 + 4*8 = 40 Rs per hour Money saved per year = 40*5*30000/60 = 2 Lakh Return on Investment in 1 year
Decision = Invest
First, Check whether this machine is the bottleneck or not
Case A: The machine is a non-bottleneck -
So, increasing its speed further will not help the co. in producing and selling more parts The additional throughput generated = 0
Decision = Do not Invest
Case B: The machine is a bottleneck - the one choking the flow of products.
The additional no. of units that can be produced and sold because of this faster machine= 5000 nos Sales Price = Rs 300 Throughput % = 50 Additional throughput = 5000*150= 7.5 Lakhs Return on investment in less than 4 moths
Decision = Invest
Other Definitions:
For-profit organizations, where Throughput and Operating expenses are both defined in terms of money, we can define
Net profit = T - OE RoI = (T - OE)/I Productivity = T/OE Investment turns = T/I
Cost world v/s Throughput world
An organization can be viewed as a chain, a collection of links (different departments in an organization)
The Cost world: The prime measurement is the weight of the chain (cost incurred in managing the departments)
So, reduction of weight of one link by 'x' kg and another link by 'y' kg, the weight of the chain will be reduced by 'x + y' kg.
Therefore, global results = sum of local results
The only way to achieve good global results is to achieve good local results everywhere.
Hence, to reduce the overall costs, one should reduce costs in all the departments
Throughput world: The Prime measurement is the strength of the chain (throughput generated by the organization)
The only way to increase the strength of the chain is to identify the weakest link and strengthen it, increasing the strength of the other links will not impact the chain's strength
Good global results 'is not equal to' sum of good local results
Hence, to improve organizational throughput, only way is to get achieve greater output from the slowest department, improving all the other departments will not have any effect on the throughput.
There are eight broad thinking process tools that can be used at arriving at any solution.
UDE Evaporating Cloud (EC): Any unresolved problem can be defined as an unresolved conflict. The way to resolve a conflict without comprise is to identify an erroneous assumption behind the conflict.
Current Reality Tree (CRT): The current reality of any system can be determined by identifying the undesirable effects faced by the company and by explaining by the logical cause of effect.
Core Conflict Cloud (CCC): The core conflict of the system can be defined three UDEs creating a generic conflict cloud. This conflict actually creates the current reality. The erroneous assumption can be challenged.
Future Reality Tree (FRT): Once the erroneous assumption is challenged, this leads to a future reality of predictable desirable effects.
Negative Branch Reservations (NBR): However there may be still negative effects even after the erroneous assumption is challenged. Injections are identified to prevent the creation of these negative branches.
Pre-requisite Tree (PRT): This thinking process starts with the identification of the implementation obstacles that we expect to encounter and we create Intermediate Objectives (IOs) verbalized as outcomes. To complete the process, the Intermediate Objectives need to be sequenced. The PRT does not ignore the obstacles but they are used as the main vehicle for building the sufficiency and sequence of the roadmap.
Strategy & Tactics (S&T): This is a logical cause effect map for a full implementation.
Multiplication of Profits:
Consider the following organisation,
Sales
100
TVC
50
T
50
OE
40
Profit
10
How can we double the profits of this organisation?
Simply by increasing the price by 10% !!!
Sales
100
110
TVC
50
50 (since qty produced & sold is still the same)
T
50
60
OE
40
40 (since qty produced & sold is still the same)
Profit
10
20
Â
A 10% jump in quantity will lead to a 50% jump in profits
