The Theory of Constraints (TOC) is a management philosophy developed by Dr. Eliyahu Goldratt. The theory states that every system has a constraint, or limiting factor, that determines the maximum rate at which the system can produce output. The objective is to identify and manage the constraint in order to optimize the system as a whole.
The theory was first proposed by Goldratt in his 1984 book The Goal.
If I had to summarize Theory of Constraint in as few words a possible, I would summarize it as: focus and leverage.
Theory of Constraints
TOC consists of Problem Solving and Management/Decision-Making Tools called the Thinking Processes (TP). TOC is applied to logically and systematically answer these three questions essential to any process of ongoing improvement:
- “What to change?” – Identify the goal and clarify the current reality
- “To what to change?” – Develop the future reality
- “How to cause the change?”- Create a plan to achieve the future reality
The Current Reality Tree (CRT) is used to identify the cause-and-effect relationships that exist in the current state of the system. The Future Reality Tree (FRT) is used to identify the desired state of the system and create a plan for how to get there.
The Prerequisite Tree (PRT) is used to identify the prerequisite conditions that must be met in order for the FRT to be achieved. The Transition Tree (TT) is used to identify the actions that need to be taken in order to move from the CRT to the FRT. The Strategy & Tactics Tree (S&TT) is used to develop the specific strategies and tactics that will be used to implement the plan. The Conflict Resolution Tree (CRT) is used to identify and resolve conflicts that may arise during the implementation of the plan.
Theory of Constraints Thinking Processes
The Thinking Processes can also be used to significantly enhance vital management skills such as:
- Win-win conflict resolution
- Effective communication
- Team building skills
- Achieving a BHAG – big harry audacious goal
Theory of Constraints Applications
The thinking processes have been applied to develop the following applications:
- Drum Buffer Rope
- Critical Chain Project Management
- Replenishment (Supply Chain)
- Mafia Offers
- Solution for Sales
- Management Skills
- Throughput Accounting
Benefits of the TOC Thinking Processes include:
- They help people to think more clearly, logically and creatively.
- They provide a structure for thinking which helps people to organize their thoughts and ideas, and to see relationships between different concepts.
- The Processes encourage people to question assumptions and to challenge existing paradigms.
- They help people to develop alternatives and find new ways of doing things.
- The Thinking Processes have been used successfully in a wide range of industries and business sectors around the world.
TOC postulates that the goal is to make money now, as well as in the future. It describes three avenues to this goal:
- Increase Throughput – the rate at which the system produces money through sales
- Reduce Inventory – raw materials and finished goods
- Reduce Operating expenses – The costs of running the system, such as labor, rent, and electricity
The Theory of Constraints is a systems thinking approach that can be used to improve organizational performance. It is based on the idea that there are always constraints that limit the performance of any system. Otherwise companies would have unlimited profits.
Five Focusing Steps – the Theory of Constraints 5 Steps
- Identify the constraint: This is the first step in improving organizational performance. It is important to identify what is constraining the system so that it can be leveraged.
- Exploit the constraint: Once the constraint has been identified, it is important to exploit it so that the system can perform at its best. This may involve making changes to the way the system is operated so that the output of the constraint is maximized.
- Subordinate everything else to the constraint: Once the constraint has been exploited, it is important to subordinate everything else to it. This means that all other activities in the system must be aligned with the goal of exploiting the constraint.
- Elevate the constraint: This step involves finding ways to improve the performance of the constraint so that it can handle more work and become less of a limiting factor. This may involve making changes to the system so that the constraint is more efficient or investing in new resources to improve its performance.
- If necessary, go back to step 1: Once the constraint has been exploited and elevated, it is possible that another part of the system will become the new limiting factor. In this case, it is necessary to go back to step 1 and start the process again.
However, you should NOT continually cycle through these steps. It’s ideal to strategically place your constraint. It’s much easier to leverage a stationary constraint.
Dr. Goldratt’s Theory of Constraints is being used by manufacturing and project management organizations worldwide to improve efficiency and profitability but it can be applied to any system in which there is a goal that is limited by one or more factors. For example, a company might be trying to maximize profits, but there are constraints on production capacity, sales, or resources that limit how much profit can be made. By identifying and exploiting the constraint, the company can increase profits.
Thousands of corporations have used the Theory of Constraints to improve their performance, including such major organizations as General Electric, Ford, Motorola, and Nestle. In addition, many small and medium-sized businesses have used the Theory of Constraints to dramatically improve their performance.
TOC is taught in over 200 colleges, universities and business schools around the world, and has been translated into over 30 languages.
The Theory of Constraints is based on the following five core ideas:
- There is always at least one constraint that limits a system’s performance.
- The goal of any business should be to maximize profits by exploiting the constraint and subordinate everything else to it.
- The key to improving profitability is to identify and manage the constraint.
- To do this, businesses need to use a holistic approach that takes into account all aspects of the business system.
- The Theory of Constraints provides a comprehensive framework for thinking about and managing businesses.
Dr Goldratt’s books have sold over 6 million copies in 36 languages and his ideas have been adopted by organizations all over the world.
Additional Theory of Constraint topics
- Operations & Scheduling (Drum Buffer Rope)
- Finance & Measure (Throughput Accounting)
- Critical Chain Project Management (CCPM)
- Distribution & Supply Chain (Replenishment)
- TOC on Sales
- TOC on People Management
- TOC on Marketing (Mafia Offer)
- TOC on Strategic & Tactics
- TOC Thinking Processes (free TOC critical thinking videos)
Here are descriptions from other outside organization and writers:
-A management philosophy developed by Dr. Eliyahu M. Goldratt that can be viewed as three separate but interrelated areas-Iogistics, performance measurement, and logical thinking. Logistics include drum-buffer-rope scheduling, buffer management, and VAT analysis. Performance measurement includes throughput, inventory and operating expense, and the five focusing steps. Thinking process tools are important in identifying the root problem (current reality tree), identifying and expanding win-win solutions (evaporating cloud and future reality tree), and developing implementation plan; (prerequisite tree and transition tree). APICS Dictionary, James F. Cox III and John H. Blackstone Jr., Editors, 9th edition, Falls Church,VA, 1998.
“TOC is a multifaceted management philosophy … a systematic reexamination of some of the most fundamental beliefs in today‘s management, culminating in a new approach to address problems facing us today.” *Mabin, Victoria J.; Balderstone, Steven J. (1999). The World of the Theory of Constraints: A Review of the International Literature, St. Lucie Press.
“TOC is more than a set of tools or techniques, though it certainly contains these. It is more fundamentally a paradigm shift which demands that we think about our problems and solutions, our goals and objectives, policies, procedures and measures, in a different way.” *
“TOC is also known by various other names, including Constraint(s) Management, Synchronous Flow Manufacturing (SFM), Synchronous Production (SP), and OPT. These terms are sometimes used synonymously with TOC, but are more often (and more correctly) used to describe the earlier components of TOC rather than the more recent parts, such as the Thinking Processes.” *