Theory of constraints

The theory of constraints is originally formulated by Eliyahu Goldratt introduced in his renowned book “The Goal”. In the book, the theory of constraints is concerned to maximize throughput or the rate at which the process or resource produces good or service. Throughput can be applied into three levels; 

Corporate level – throughput is the rate of revenue by selling your product.
Production level – throughput is the rate of producing the product you are selling.
Machine level – throughput is the rate at which individual equipment produces output in making the product.

The concept presented in this material will focus on the production and machine levels. Every business or process has a constraint controlling the pace of the entire system. A constraint is referred to as a bottleneck hindering the flow of material or information. The idea of TOC is to identify the constraint and systematically improve its performance to increase the throughput of the whole system. 

Figure 11. Drum-buffer-rope concept.

A typical production line in figure 11 shows that workstation C is a constraint (drum) because it has the lowest output limiting the entire production throughput. Improvement of constraint capacity must be the top priority to increase throughput. To ensure the drum operates constantly, the needed level of inventory (buffer) is kept behind the constraint. A buffer protects the bottleneck from variability from non-constrained processes. The constrained resource must run even during breaks, so it does not lose any capacity. Drum determines needed raw materials to be released in the production through the signal (rope). The role of rope is to avoid excess work-in-process inventory buildup by releasing material on “as needed” basis as determined by the constraint.

TOC is a powerful approach to increase efficiency and profit both in the short and long term. The following tools will enable manufacturers to achieve efficiency and profit;

Five focusing steps

Figure 11. Five focusing steps in theory of constraints.

Identify the constraint – assess the current process and determine which resource, machine, or process is causing lower production throughput.

Exploit the constraint – take whatever actions to improve the constraint capacity using existing resources (e.g. avoid shutdown during breaks, eliminate non-value adding activities, remove interruptions).

Subordinate everything to constraint – synchronized entire processes according to constraint capacity. Ensure non-bottlenecks processes supports the constraint.

Elevate the constraint – when the constraint is still there even after improvements are made, it is time to explore options that elevates constraint capacity (add people or machines, subcontract, switch to better technology). Elevating a constraint usually requires capital investment.

Repeat the process – the whole process is part of continuous improvement. After improvements are realized, a new bottleneck will emerge, and you must do the same steps to address newfound constraint. Doing the steps repeatedly will improve bottlenecks capacity resulting in the overall improvement of throughput.

The thinking processes

The thinking processes or commonly known as TP tools are the systematic problem-solving methodology based on the cause-and-effect principle.  The role of TP tools is to track down the root cause of the problem and take actions to eliminate or minimize its impact. Implementing TP tools will answer fundamental questions:

–  What needs to be changed?
–  What to change to?
–  What actions will cause the change?

Thinking processes are executed using the tools including;

Current reality tree (CRT) – revisit the current state or reality of the process and pinpoint what causes undesirable effects (UDEs) to surface. UDEs are the results of the underlying core problem. Current reality tree tool will document the current state and will answer the question “what to change?”.

Evaporating cloud tree (ECT) – evaporating cloud tree also referred to as conflict resolution diagram (CRD) used to identify and evaluate potential changes that will remove UDEs. It is a tool useful in resolving conflicts between varying problem-solving techniques. ECT lays the groundwork for the creation of a future state. ECT answers the question “what to change to?”.

Future reality tree (FRT) – it is a diagram used to visualize the future state after core problems are identified and problem-solving conflicts are resolved. FRT transforms undesirable effects to desirable effects by implementing injections designed to remove UDEs. FRT also answers the question “what to change to?”.

Strategy and tactics tree (S&T) – the name itself depicts that strategy and tactics must go together to effect change in the organization. S&T provides an actionable plan for improvement between strategic and tactical level. S&T is an implementation plan consisting of policy and procedures (tactics) needed to attain corporate objective (strategy). S&T is intended to supersede the previously used pre-requisite and transition tree.

Throughput accounting

Unlike the traditional accounting that focuses on cost reduction per unit, throughput accounting stemming from the theory of constraints principles has different accounting approach. Throughput accounting focuses on maximizing profit. Instead of calculating the cost of goods sold used in traditional accounting, throughput accounting uses true variable costs (TVC) to determine total throughput. True variable costs are direct materials, sales commissions, and freight.

Throughput accounting uses three main measures;

Throughput – the rate at which products are sold less true variable costs.
Operating expense – money spent in producing throughput other than true variable costs.
Investment – money invested in machines and inventory in order to create throughput.

Throughput equation:

Throughput = sales revenue – true variable costs

Since throughput is controlled by a bottleneck, careful attention must be given to anything that passes through the constraint to ensure that only critical or high profit generating products are processed by the constraint.

Like any other approach, throughput accounting strives to maximize profit while minimizing operating expenses and investment. To elevate the bottleneck, operational decisions should be evaluated based on priorities;

Priority 1 = impact on throughput
Priority 2 = impact on investment
Priority 3 = impact on operating expense

Throughput accounting is concerned with an increase in throughput. Any incremental increase in investment or operating expense should not decrease throughput. Conversely, a decrease in investment or operating expense should not decrease throughput.

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