12 December 2013
Theory of Constraints
Theory of Constraints (TOC), the continuous improvement methodology that many of us first encountered in Dr. Eliyahu Goldratt’s business classic The Goal, has enjoyed numerous successful industrial implementations, worldwide. TOC is a focused methodology that locates and systematically addresses that which stands in the way of the realization of a business unit’s primary objective. For a manufacturing business unit, TOC originally took that primary objective to be “to make more money, now and in the future.”
TOC operates through a five – step improvement cycle:
Step 1: IDENTIFY the system’s constraint
Step 2 Decide how to EXPLOIT the system’s constraint
Step 3: SUBORDINATE everything else to the above decision.
Step 4: ELEVATE the system’s constraint
Step 5: If in the previous steps a constraint has been broken, Go BACK to Step 1.
Warning: Do not allow inertia to cause a system’s constraint.
Red Curve, Green Curve
The TOC methodology results in continuous performance improvement over time. However, Goldratt noticed that a plot of that performance over time “contains two conceptually different curves — the red curve, where the rate of improvement grows leading to exponential growth, and the green curve, where the rate of improvement decays leading to diminishing returns. Initially, Goldratt and his staff recommended that companies “… strive for the red curve and condemn the green curve.” Later, when “… reality demonstrated the absolute necessity of sustaining rapid growth”; Goldratt realized “… that the green curve is as essential as the red curve. Actually, we are dealing with two types of performances: financial growth and stability.”
This matter of green curve stability brings two lines of thought to mind:
>> Steady – State Manufacturing — Everybody who has actual manufacturing experience knows what steady-state operations mean to achieving the production schedule and the budget. No upsets, no dramas = no early – morning visits from Bill Peach. Further, industrial practices such as ISO 9001 and Six Sigma have their bases in facilitating constancy in operations. Operational stability is sufficiently important that many firms go to great pains to foster it.
>> Sustainability — Essays to this blog are intended to be useful to manufacturing business units that are pursuing Sustainability, meaning that they intend to thrive in perpetuity. Maybe it is well that the curve representing stability is colored green. Incidentally, Goldratt later redefined the primary objective for manufacturing business units from “to make more money, now and in the future” to “become an ever-flourishing company”.
Stacked Green Curves
Regardless of which color one uses to plot performance curves, continuous operating performance entails continuously improving financial performance — red curve growth. One approach is to approximate the red curve through a succession of green curves. Each green curve represents an iteration of the TOC five-step improvement cycle. Conceptually, the distinction between red and stacked green results from the addition of another step to the improvement cycle. This additional step occurs after step five of each cycle and may run coincidently with steps 1 and 2 of the following cycle.
The additional step amounts to a change management process that confirms that the physical changes in fact produce the desired results, and that work instructions, maintenance procedures, training programs, safety precautions and so on are appropriately revised and integrated into routine practice.
The extent of this additional step depends on the nature of the change implemented. Simple changes usually can be integrated quickly. However, the active system constraint often lies beyond the factory floor — perhaps in raw materials, in product design, in corporate policy or in the market. In such situations, the change(s) involved may have ripple effects ranging from health and environmental concerns, third – party certifications or work rules; to customer acceptance issues and even the potential for litigation. In today’s rapidly changing global economy, change management practices must always be sufficiently thorough and robust to integrate the change and the effects of that change, regardless of how wide the ripples become.
Comments for Manufacturers
>> The Tail of the Green Curve: Notice that each stacked green curve tails toward a horizontal asymptote — returns on additional effort diminish with time. Goldratt’s usual view, as I understand it, has been to elevate the constraint, then move on to the next constraint as quickly as possible. Goldratt’s warning to not allow inertia to cause a system’s constraint is sound advice. However, I think that there may be exceptions. In my view, safety initiatives, for example, should be pursued indefinitely, since there is no really acceptable level of permissible human injuries. Reconciling indefinite pursuit of one initiative with Step 3 of the next initiative requires careful thought.
>> Size Doesn’t Matter: TOC addresses how to grow a manufacturing business. Initially, TOC was viewed as remedial. However, the active constraint to growth may become seizing opportunities rather than addressing problems. The growth of General Electric during the last two decades of the 20th century provides an illustration of the power of stacked green curves on a very large scale. During the 1980’s and 1990’s, GE pursued a series of initiatives, including Work-Out, #1 or #2 market presence, Globalization, Boundary less organization and Six Sigma. Each was emphasized for a while, then melded into GE’s corporate culture, providing support for the next initiative. GE’s financial performance over those decades was little short of spectacular. If a company the size of GE can accommodate changes like Globalization, there is hope for success for anyone on any scale.
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.
 The direct quotations in this and the following paragraph are from “What is TOC?”, E. Goldratt’s Chapter 1 in J. Cox III and J. Schleier, Theory of Constraints Handbook, McGraw Hill Professional (2010)
 Goldratt’s The Goal takes the form of a business novel. The book begins when Alex Rogo, a Plant Manager, arrives at his plant, early as usual. But not early enough. Bill Peach, Alex’s boss from headquarters, is already in the plant showing people how to get orders out the door.
 “thrive in perpetuity” is from Adam Werbach’s Strategy for Sustainability, Harvard Business Press (2009), page 9
 The stacked green curves and the additional step are not, to my knowledge, explicit parts of the TOC methodology. They appear to me to be intuitively obvious and implicit in the TOC philosophy. One or both may well be apparent to other practitioners. There may be published references to either or both, although I am not aware of any.
 This is not to imply that GE used TOC to determine which initiatives to initiate and conduct. TOC became a commercial reality during the same time period as these initiatives. My point is that the stacked green curve model can work, even on a huge scale.
 There are a number of books about GE and Jack Welsh, GE’s CEO, during the ‘80s and ’90s. For example: J. Welsh and J. Byrne Jack: Straight from the Gut, Business Plus (2003)