Theory of Constraints

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Framework Primer
Theory of Constraints (TOC)
Presentation created by
Identify the
Constraint
Exploit the
Constraint
Subordinate
Everything to
the Constraint
Elevate the
Constraint
Prevent Inertia
from Becoming
the Constraint
1 2 3 4 5

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Contents
Solution Areas & General Principles
Process of ongoing Improvement (POOGI)
Overview
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The Theory of Constraints is a methodology for identifying the most
important limiting factor—i.e. constraint—and systematically improving it
Presentation Overview
The Theory of Constraints (TOC), developed by Dr. Eliyahu Goldratt, is a
methodology for identifying the most important limiting factor (i.e. constraint)
that stands in the way of achieving a goal and then systematically improving
that constraint until it is no longer the limiting factor.
There is always at least one constraint, and TOC uses a focusing process to
identify the constraint and restructure the rest of the organization around it.
TOC adopts the common idiom "a chain is no stronger than its weakest link."
This means that processes, organizations, etc., are vulnerable because the
weakest person or part can always damage or break them or at least adversely
affect the outcome.
In manufacturing, the constraint is often referred to as a “bottleneck.”

Traditional vs. TOC Approach
Whereas traditional management methods aims to make improvements
throughout the organization, TOC takes a more focused approach
Organizations are a complex web of people, equipment, methods, materials and measures.
This detailed complexity is bad enough. Additionally, there exists the dynamic complexity of
changing customers, suppliers, workforce, regulations, etc. This level of complexity captures the
challenge faced by management teams today.
TRADITIONAL MANAGEMENT METHODSTRADITIONAL MANAGEMENT METHODS
Traditionally, management has divided the organization
into smaller, more manageable pieces. The objective is
to maximize the performance of each part. The global
improvement is assumed to be equal to the sum of the
local improvements.
THEORY OF CONSTRAINTSTHEORY OF CONSTRAINTS
TOC claims that a change to most of the variables in
an organization will have only a small impact on the
global performance (on the bottom line). By trying to
improve everything everywhere, the risk is that nothing
will be improved that really counts. If only a few key
variables in any system influence overall system
performance at any given time, trying to improve most
of the system will be counterproductive.
VSVS

TOC Detailed
TOC uses a systems approach—and recognizes that, like a chain, a
system is only as strong as its weakest link
Traditional TOC
Theory of Constraints provides a set of holistic processes and rules, all
based on a systems approach that exploits the inherent simplicity within
complex systems through focusing on the few variables called
constraints. This view o an organization is a way to synchronize the parts
to achieve ongoing improvement in the performance of the system as a
whole.
Goldratt likens systems to chains, or to networks of chains.
Like a chain, a system is only as strong as its weakest link.
In business systems, it is usually the capacity of one element (the constraint) that
determines the overall performance of the business.
An interesting phenomenon about chains is that strengthening
any link except the weakest one does not improve the strength
of the whole chain. Strengthening the weakest link produces
an immediate increase in the strength of the whole chain,
but only up to the level of the next weakest link.

Types of Constraints
In a commercial system, constraints fall under 3 categories—Capacity
Constraint, Market Constraint, and Time Constraint
Capacity Constraint Market Constraint Time Constraint
• A resource which cannot
provide timely capacity
as demanded by the
system.
• The amount of
customers orders is not
sufficient to sustain the
required growth of the
system.
• The response time of
the system to the
requirement of the
market is too long to the
extent that it jeopardizes
the systems ability to
meet its current
commitment to its
customers as well as the
ability of winning new
business.
1 2 3

Contents
Overview

Also known as Five Focusing Steps, POOGI is a 5-step approach to TOC
As the name suggests, this approach drives ongoing improvement in the organization.
Identify the
Constraint
Exploit the
Constraint
Subordinate
Everything to
the Constraint
Elevate the
Constraint
Prevent Inertia
from Becoming
the Constraint
• Identify or choose
the system’s
constraint
• Decide on how to
exploit the system’s
constraint
• Subordinate
everything else to
the decision
• Evaluate various
alternatives to
elevate the system’s
constraint
• If the constraint is
broken go back to
step 1, but do not
allow inertia to
cause the system’s
constraint.
1 2 3 4 5

POOGI – Step 1
In the initial step, identify the system’s constraint
It is impossible to manage a constraint until you find out what it is—and it is surprisingly
easy to find, once you know how to look.
Strengthening any link of a chain (apart from the weakest) is a waste of time and
energy.
Similarly, the vast majority of efforts to "improve" something in the organization fail to result
in more profits for shareholders, delight for customers, or satisfaction for employees.
This is because most initiatives are not focused on the constraint of the
organization.

POOGI – Step 2
In step 2, exploit the constraint by leveraging various Lean Management
tools
The output of the constraint governs or restricts the output of the organization as a whole. It
is therefore imperative to squeeze as much as possible out of it. Maximize the utilization and
productivity of the constraint (NOT utilization and productivity of non-constraints).
Rather than immediately purchasing more of the constraint (by buying machines, hiring
workers, increasing the advertising budget, etc.), we should first learn to use the resources
that we already have more efficiently.
The constraint of most organizations is not well utilized, often less than 50% on a 24x7
basis. If the reasons for under-utilization are not immediately clear, try measuring the
constraint's OEE, including the breakup of availability/quality/performance. Gather the
underlying data and analyze it using Pareto techniques. Once the primary causes are
identified, use fishbone diagrams and Five Why analysis to drill down to the root cause for
under-performance.
When the root causes are clear, eliminate them on a permanent basis. Quality and
productivity tools such as Six Sigma, Poka-Yoke, design of experiments, SMED, etc. often
provide the answer, depending upon the nature of the problem.

POOGI – Step 3
Next, subordinate everything else to the constraint(s)
By definition, any non-constraint has more capacity to produce than the constraint
itself. Left unchecked, this results in bloated WIP inventory, elongated lead times, and
frequent expediting/firefighting.
Therefore, it is critical to avoid producing more than the constraint can handle. In a
manufacturing environment, this is accomplished by choking the release of raw material in
line with the capacity of the constraint.
It is also as important to ensure the rest of the system supports the work of the constraint at
all times. It must never ever be starved for inputs, or fed poor quality materials. This can be
achieved by maintaining a reasonable buffer of safety stock.
Likewise, other established policies and habits can hamper productivity at the
constraint and must be systematically aligned to achieve maximum performance.

POOGI – Step 4
In step 4, elevate the constraint
Once the capacity of the system is exhausted, it must be expanded by investing in additional
equipment, investing in additional land, hiring people, etc.
Instinctually, we tend to gloss over the first 3 steps and jump straight to elevation.
Implementing the first 3 steps properly typically expose a minimum of 30% hidden capacity
within the first few months. This capacity is available free of cost, without any investment.
Investing too soon raises risk unnecessarily.
Only elevate once exploitation (step 2) and subordination (step 3) is fully complete—if at all.

POOGI – Step 5
Lastly, in step 5, prevent inertia from becoming the constraint
Once elevated, the weak link may not remain weakest.
Consider elevating other resources to retain the old constraint, depending on where you
wish to have the constraint in the long-term.
A new constraint demands a whole new way of managing the system.
Therefore, we return to Step 1, and thus begins our journey of continuous
improvement.

Contents
Overview

Solution Areas (1 of 2)
Nine functional solution areas have been identified where TOC can be
applied
1 Operation (Production) Management - Make to Order (MTO) environment and Make to Availability
(MTA)
Project Management - Critical Chain Project Management (CCPM)
Distribution & Supply Chain Management - Distribute to Availability (DTA)
Finance & Measurements - Throughput Accounting
Sales Management
Marketing - Development of Market Offers
Managing People - Management Tools (MT)
Strategy & Tactics - How to develop a company-wide improvement plan
2
3
4
5
6
7
8

Solution Areas (2 of 2)
9 Thinking Processes - Everything within a system is connected by cause and effect relationships.
Identification of the causes leads us to the core problem/contradiction/conflict and this is the level for
sustainable solutions. The use of cause and effect relationships helps us to structure our thinking, log
our analysis and understand the suggested solution for any problem. The TOC Thinking Processes
provides a set of tools in doing so.

Rules of Thumb about Constraints
Recognize these general principles, which new TOC practitioners often
find surprising
• You will always have a constraint, so choose wisely (perhaps the most capital intensive, or energy
consuming, or largest batch, or longest touch time, etc.).
• If you identify the wrong constraint, it is easily rectified and causes no permanent damage. The
POOGI process autocorrects for errors made over time.
• The constraint may appear to shift suddenly based on product mix. However, this is often due to
batching practices, rather than actual shifting of the constraint.
• Most systems typically have one single resource constraint, such as a machine or department.
− This constraint, which may or may not be binding at any given point of time, is referred to as the Capacity-
Constrained Resource (CCR). In certain cases, there may be 2-3 CCRs, but rarely more.
• Permanent constraints typically include sales/marketing (with better techniques we could always
raise prices) and R&D (with more awesome products we could make far higher margins).
• Eventually, the constraint should be stabilized. Frequently, shifting constraints cause havoc on
policies, procedures, and people.

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Flevy (www.flevy.com) is the marketplace
for premium documents. These
documents can range from Business
Frameworks to Financial Models to
PowerPoint Templates.
Flevy was founded under the principle that
companies waste a lot of time and money
recreating the same foundational business
documents. Our vision is for Flevy to
become a comprehensive knowledge base
of business documents. All organizations,
from startups to large enterprises, can use
Flevy— whether it's to jumpstart projects, to
find reference or comparison materials, or
just to learn.
Contact Us
Please contact us with any questions you may have
about our company.
• General Inquiries
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