26 September 2013
The Theory of Constraints
In 1984, Israeli physicist Eliyahu Goldratt surprised the manufacturing world with The Goal,  a business novel that offered a different approach to continual improvement and to attaining operational excellence. That approach, which Goldratt later called the Theory of Constraints (ToC), amounts to an application of systems thinking  to plant floor manufacturing.
ToC takes exception to much of the basic thinking behind costs- and efficiencies-based management. This includes accounting ideas such as producing “profits” by rolling costs into work in process and finished goods inventories. It also includes operating ideas like striving for 100% on-line, at rate performance for all of the production equipment, all of the time. Instead, ToC emphasizes throughput (revenues, not inventory accumulation), investment (inventories, equipment and facilities) and operating expenses. Performance improves when throughput increases while investment and operating expenses decrease, in an absolute sense or in proportion to the increase in throughput. Emphasis on improving throughput trumps emphasis on reducing costs because costs cannot be reduced to less than zero, while throughput, in principle, can be increased without apparent upper bound.
ToC regards a manufacturing facility as a system consisting of interacting and interdependent processes. Those processes are not all equally important to increasing throughput. A few, usually one, process limits — constrains — the system. ToC focuses on identifying the limiting process and addressing that limitation. “Addressing that limitation” means increasing the capacity of that process, such that it no longer bottlenecks the facility. In addition, ToC uses a buffer before the constrained resource and a raw materials release system to prevent overproduction at non-constrained resources. Once a constraint is addressed and throughput increases, another constraint will be revealed — otherwise, throughput would be unbounded. So, ToC is an ongoing process of identifying and addressing constraints.
As production capacity increases, the constraint to increasing revenues eventually moves from the factory to the market. Often, improved lead times provide an advantage on attaining new business. Moreover, Goldratt noticed, through actual ToC implementations, that the “improvements in operations not only open new opportunities but actually provide the company with a decisive competitive edge”. Goldratt’s later business novel, It Isn’t Luck,  provides examples of businesses with a decisive competitive edge. It Isn’t Luck also describes the thinking processes involved.
“A decisive competitive edge is gained only when a company satisfies a significant market need to an extent that none of its significant competitors can.” — E. Goldratt
For Smaller Manufacturers
The Theory of Constraints is very powerful because the systems thinking behind it is very powerful. As one would expect with a system, a full implementation of ToC almost always needs to be holistic (across the entire business unit), rather than piecemeal. A full implementation also needs the support of somebody with extensive training in ToC and its implementation. The thinking behind ToC is so different that implementations during periods of duress may be easier than implementations during good times, because of less staff and corporate resistance to the necessary changes.
That said, managers of manufacturing concerns can learn quite a lot by reading Goldratt’s business novels and studying Goldratt’s thinking process. It was once said that Goldratt’s personal objective was nothing less than to teach managers how to think.
Thoughtful comments and experience reports are always appreciated.
… Chuck Harrington (Chuck@JeraSustainableDevelopment.com)
P.S: Contact me when your organization is serious about pursuing Sustainability … CH
This blog and associated website (www.JeraSustainableDevelopment.com) are intended as a resource for smaller manufacturers in the pursuit of Sustainability. While editorial focus is on smaller manufacturers, all interested readers are welcome. New blog posts are published on Wednesday evenings.
 Goldratt, E. and Cox, J. The Goal, A Process of Ongoing Improvement, Third Revised Edition, North River Press (2004)
 For more on systems and systems thinking, see: More on Processes and Systems, this blog (16 May 2013): http://blog.jerasustainabledevelopment.com/2013/05/15/more-on-processes-and-systems.aspx
 Dettmer, William, Goldratt’s Theory of Constraints, A Systems Approach to Continuous Improvement, ASQ Quality Press (1997). As his title suggests, Dettmer does a good job of formalizing the process aspects of Goldratt’s business novels.
 From Goldratt’s introductory chapter in Cox and Schleirer (editors), Theory of Constraints Handbook, Introduction by Eliyahu Goldratt, McGraw Hill (2010). The Handbook is a tool for those actually involved in ToC implementations. It is rather pricey. However, Goldratt’s introductory chapter itself is available in Kindle format from Amazon for a few dollars. It is well worth reading.
 Goldratt, E. It’s Not Luck, North River Press (1994)