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Theory of Constraints
Theory of Constraints is a method to identify
bottlenecks or other constraints and exploit them to
the extent possible.
Identification of constraints allows management to take
action to alleviate the constraint in the future
Reduce cycle time
Time from receipt of customer order to shipment
Improve manufacturing cycle efficiency (MCE)
Processing time / total cycle time
Goldratt contends that systems are analogous to chains, or
networks of chains. Like a chain, the system performance is
limited by the weakest link.
This means that no matter how much effort you put into
improving the processes of a system, only the improvements
to the weakest link will produce any detectable system
Throughput is limited by the weakest link... the constraint!
Theory of Constraints
Management of Bottlenecks
A Bottleneck is the process or step which has
the lowest capacity and longest throughput.
Throughput Time is the total time from the
start to the finish of a process.
Bottlenecks can be internal or external to a
Significance of bottlenecks
Maximum speed of the process is the speed of the
Any improvements will be wasted unless the bottleneck
Bottlenecks must be identified and improved if the process is
to be improved
Where is the Bottleneck?
It takes 10 + 20 + max (15, 12) + 5 + 10 = 60 minutes to complete a loan application.
Unless more resources are added at step B, the bank will be able to complete only 3 loan
accounts per hour, or 15 new load accounts in a five-hour day.
1. Check loan
put them in
3. Check for
4. Enter loan
into the system
What is Throughput
The rate at which the system generates money through
sales minus raw materials and purchased parts.
All the money received from customers minus raw
The rate at which the system makes money(sales
minus totally variable costs). Direct labor should not
be deducted in calculating Throughput.
Sales are only recognized when money is available to
the firm, i.e., production for inventory is not a part of
What is Inventory
All the money that system has invested in purchasing
things which it intends to sell
Inventory is liability not an asset
Raw materials and finished good are inventory
Machines and fixtures are inventory
Scrap material is inventory
What is Operating Cost
All the money the system spends in order to turn
inventory into throughput
All employee time is operating expense
Depreciation of a machine is a operating expense.
Scrap material thrown away.
All expenses not deducted in arriving at throughput.
This includes direct labor and all operating and
Theory of Constraints Covers Many Things
1. Identify the Constraint
2. Exploit the Constraint
3. Subordinate everything
to the Constraint
4. Elevate the Constraint
5. Repeat for the new
Theory of Constraints - FIVE FOCUSING STEPS
(Which will Strengthen the Chain)
Step 1: Identify the system’s constraint(s).
What is the Goal?
What is Throughput?
What is Inventory?
What is Operating Expense?
1. Identify the System's constraints.
The process is analyzed so that a task or activity that limits the productivity of
an entire system can be identified. A system constraint may be identified by a
long queue of work or long processing times.
Step 2: Decide how to exploit the system’s constraint(s).
What is the constraint?
How do we get as much throughput as possible?
2. Decide how to exploit the system's constraints.
In this step, decisions must be made on how to modify or redesign the task or
activity so that work can be performed more effectively and efficiently.
Step 3: Subordinate everything else to the decisions of Step 2
3. Subordinate everything else to the above decision. (step 2)
Now, management directs all its efforts to improving the performance of the
constraining task or activity and any other task or activity and any other task or
activity that directly affects the constraining task or activity.
Step 4: Elevate the system’s constraint(s).
4. Elevate the system's constraint.
In this step, additional capacity is obtained that will increase (elevate) the overall
output of the constraining task or activity. This differs from step 2 in that the added
output comes from additional purchased capacity, such as buying a second machine
tool or implementing a new information technology.
Step 5: If a constraint is broken in Step 4, go back to Step 1.
What might happen if the constraint is elevated?
5. If, in the previous step, a constraint has been broken, go back to step 1 but do not
allow inertia to cause a new constraint
This sets up a process of ongoing improvement. As a result of the focusing process,
the improvement of the original constraining task or activity may cause a different
task to become a constraining task or activity. Inertia could blind management
from taking steps to improve the system's output now limited by a new
THE THINKING PROCESSES (TP) OF TOC
Tools that enable us to use logic to gain an
understanding of our reality and then to find ways of
BASIC CONSTRUCTS OF THE TOC TP:-
Necessity: “In order to…I must…”
EXAMPLE OF CAUSALITY
I touch a
I don't get
I touch a
EXAMPLE OF NECESSITY
“In order to…I must…”
Do not touch a
Touching a hot stove will
Applying TOC at the Marine Corps Maintenance Center
The Marine Corps –
Responsible for the regeneration & reconstitution of
Complex maintenance operations
Repairs & overhauls of obsolete equipments
Production not able to meet demands
Improves capacity decisions in the short-run
Avoids build up of inventory
Aids in process understanding
Avoids local optimization
Improves communication between departments
Negative impact on non-constrained areas
Diverts attention from other areas that may be the next constraint
Temptation to reduce capacity
Ignores long-run considerations
Introduction of new products
Continuous improvement in non-constrained areas
May lead organization away from strategy
Not a substitute for other accounting methods