“There is Nothing as Practical as a Good Theory” – Kurt Lewin, 1952
What is the Theory of Constraints?
Focus! The core of the Theory of Constraints (TOC) is to focus correctly, on those few critical things that prevent your organization from achieving more of your goal.
In fact, one can identify a goal and two necessary conditions. The goal might be to make money now and more in the future. To do that a business must satisfy their clients (Clients include those to whom products are sold plus the other external stakeholders like the social, political and physical environment) sufficiently (now and in the future) and at the same time their employees must also be sufficiently satisfied (now and in the future). Any one of these three can be the goal; the other two will always be necessary conditions that must be fulfilled!
If you look around your company there are many, many things that can be improved. Organisations use the Theory of Constraints to find which of the possible improvement activities will have the greatest impact on their chosen bottom line. Since Eli Goldratt’s first book ‘The Goal’ TOC has been used to make very significant improvements in many different areas, from production to health care, from project management to distribution, marketing and sales and many more.
Organisations, even those in deep (financial) difficulties find it very difficult to focus their energies on what really counts. Managers and people act but base their actions on erroneous assumptions or paradigms – will these actions really have an impact on the bottom line. A lot of good work gets done, but too little of the effort finds its way to a significant bottom line effect.
To focus an organisation is not easy. Organisations are broken down into departments or divisions and every one of these departments has a target to improve – sales to increase revenues, production to minimize cost (and investment) etc. Management’s working assumption seems to be - if every part of the company is optimal, then the entire organisation will also be optimal. This is never so. An action by the sales organisation can very easily disrupt the factory’s efforts to minimize cost and inventories. Actions in production and the supply chain can easily cancel good sales efforts.
Optimizing all the parts does not result in a global optimum because a business lives in a World of high uncertainty coupled with many dependent events necessary to produce a product or service. The two factors ensure a local optimum can only be achieved in one (or a very few) place(s). Focus must determine where this place is and how it should be exploited.
This leads to the Five Focusing Steps of TOC.
1. Identify the constraint. In the economic environment of 2009 it is quite easy to determine that there is not enough demand from our markets. Businesses need to sell more to be profitable and to have satisfied employees. In many businesses there is something blocking clients from buying more. That something could be customer demand, but it can also be our company not doing things it should be doing or doing things it should not be doing. It is too easy to place the blame on the financial crisis.
2. Decide how to exploit the constraint. This simply asks the question – ‘what should we do in order to maximize the constraint’s performance?’ In today’s World, what would cause clients to buy much more from our company? To what should we change our offering so that our clients (and potential clients) buy much more from us? To lower prices is not the answer!
3. Subordinate everything else to the above decision. This is a difficult step. It says that all resources other than the constraining resource must subordinate (often to sub-optimize their operations) in order to get the absolutely maximum from the constraint. If every department is charged with optimizing their part, then other departments cannot support the constraint properly. The business as a whole will suffer, and consequently so will employees and clients.
4. Elevate the constraint. If the first three steps have been successfully implemented the organisation may find that the constraint has still not been removed. If this is the case, then the time has come to expand the constraint’s capacity. These first four steps help prevent unnecessary investment and when an investment is made it will be done in the correct place.
5. Go back to step 1.BUT do not let your own inertia become the system’s constraint!
