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Theory of Constraints (TOC) is an important management concept introduced by Dr. Eliyahu M. Goldratt during the year 1984.In his book entitled “The Goal”, which is designed to help organizations consistently achieve their goals. The title originates from the assumption that any manageable system is restricted in achieving more of its goal by a very less number of constraints, and that there is often at least one constraint(Eliyahu, 1986). The TOC process tries to identify the limitation and restructure the remaining of the organization surrounding it, via the usage of the Five Focusing Steps.
TOC maintains that the goal of an organization is to make wealth both in the present and in the future. To measure an organization’s performance in procuring this goal, two models of measurements have been suggested by Goldratt and Fox (1986, p. 31): global (financial) measurements and functional measurement. Since global measurements can be expressed through the functional measurements, operational measurements are identified in the beginning. (1) Throughput (T): the rate at which the system produces wealth through sales (Output which is not sold cannot be considered as throughput .It is inventory.).(2) Inventory (I): all the money invested in commodities the system tries to sell (3) Operating expense (OE): all the money the system expends in converting inventory into throughput.
Throughput is defined as sales minus “wholly variable” cost. Inventory consists of any physical inventories such as raw material, tasks in progress, unsold finished items, and consists of tools, building, capital, devices and furnishings. The Operating expense usually consists of spending on direct and indirect labor, supplies, external contractors and interest requitals.
The Key Assumption or the underlying thought concerning the Theory of Constraints is that organizations can be quantified and controlled by changes on 3 parameters: Throughput, Operating Expense, and Inventory. Throughput is wealth (goal units) created through sales. Operating Expense is wealth that goes into the system to make sure of its efficient functioning on an ongoing basis. Inventory is the capital the system invests in order to put into sale its goods and services.
The five focusing steps Theory of Constraints is based on the assumption that the rate of goal procurement is restricted by at least one constraining process. Just by increasing flow through the restriction, the whole throughput is augmented(Eliyahu, 1986). Assuming the goal of the organization has been given voice like, "Make money now and in the future”; the different steps are: 1. IDENTIFY the constraint (the resource/policy that restricts the firm from achieving more of the goal) 2. Think how to EXPLOIT the limitation (decide and ensure that the constraint's time is not wasted performing tasks that it should never do) 3. SUBORDINATE all other processes to above decision (redesign the whole system/firm to support the decision taken above) 4. ELEVATE the limitation (if required/feasible, permanently augment capacity of the constraint; "buy more") 5. If, as a result of these steps, the limitation has moved, go back to Step 1. Don't allow inertia become the constraint.
The five focusing steps help to ensure that ongoing improvement efforts are concentrated on the organization's restrictions. In the TOC language, this is named as the Process of Ongoing Improvement (POOGI).These focusing steps are the key steps to developing various specific applications(Eliyahu, 1986). These focusing steps, or the Process of Ongoing Improvement has been effectively utilized in Manufacturing and Production, Project Management, Supply Chain / Distribution created specific solutions. Other tools (mainly the TP) also led to the usage of TOC applications in the Marketing and Sales, Finance sector etc.
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Operations: In manufacturing operations and operations management, the solution tries to pull commodities through the system, rather than push them into the system. The initial methodology used is Drum-Buffer-Rope (DBR) and another one with a slight variation called Simplified Drum-Buffer-Rope (S-DBR)
Drum-Buffer-Rope is a kind of manufacturing execution method, named after its 3 components. The drum is the physical limitation of the plant: the work center or machine or operation that limits the ability of the entire system to produce more. The rest of the plant follows the beat of the drum. They ensure that the drum has task and that any of the stuffs that the drum has processed never goes wasted. The buffer gives protection to the drum, so that it always has tasks flowing towards it. Buffers in DBR have time as their unit of measurement, rather than quantity of material. This makes the priority system operate strictly based on the time an order is expected to be at the drum. Traditional DBR generally calls for buffers at different points in the system: the constraint, synchronization segments and at shipping. S-DBR possesses a buffer at shipping and governs the flow of work across the drum via a load planning methodology(Eliyahu, 1986).
The rope is actually the task release methodology for the plant. Only a "buffer time" before an order is due before it getting released to the plant. Pulling task towards the system earlier than a pre defined time ensures high task-in-process and slows down the whole system.
Finance and Accounting: The solution for finance and accounting is to employ holistic model to the finance application. This is named as ‘throughput accounting’ Throughput accounting says that one view the impact of investments and operational changes in terms of the impact on the throughput of the business. It is an alternative to cost accounting.
Project management: Critical Chain Project Management or CCPM is utilized in this area. CCPM is rooted on the idea that all projects look like A-plants: all activities come assembled to a final deliverable. As such, to shield the project from dangers and risks, there must be internal buffers to protect synchronization points and a final project buffer to shield the whole project.
Buffers are utilized everywhere in the Theory of Constraints. They form a segment of the EXPLOIT and SUBORDINATE steps of the five focusing steps. Buffers are used before the key constraint, thus making sure that the constraint is not at all starved. Buffers used in this method prevents the constraint and should allow for normal variation of processing time and the occasional upset (Murphy) before the constraint. Buffers can be an array of physical things before a task center, waiting to be refined by that task center. Buffers can also be denoted by time, as in the time before the task gets near the constraint (Cox, Eliyahu, 1986). There should always be sufficient (but not to much) task in the time queue right before the constraint. The assumption in Theory of Constraints is that with a single constraint in the system, all other parts of the system have enough capability to keep up with the work at the constraint. In a balanced way, when one task center goes down, then the whole system must wait till that task center is restored. In a TOC system, the only situation where task is in danger is if the constraint is not able to process (either since there is some sort of malfunction, illness or a "hole" inside the buffer) (Cox, Eliyahu, 1986).
Marketing and Sales: While originally focused on manufacturing and logistics, TOC has expanded lately into sales management and marketing. Its role is explicitly acknowledged in the field of sales process engineering. This technique is appropriate when your constraint is in the sales process itself or you just want an effective sales management technique and includes the topics of funnel management and conversion rates.
Conclusion: Theory of Constraints tools are widely used in identifying core problems of leadership, organizational structure, and performance appraisal; and developing solutions that addressed the core problems. The TOC tools have usually been used in dealing with physical constraints (Eliyahu, 1986). The application of this framework promises an effective strategy for management teams struggling with difficult organization programs and working towards resolution of a wide variety of issues, including managerial and interpersonal organizational dynamics. Intelligent application of the principles of TOC to organizational analysis and using TOC vocabulary in the discipline of organizational behavior will obviously produce much better results in a variety of ways unimaginable.