Theory of Constraints (introduction article)
TOC pampers the weakest chain

To make profit is not luck, but a matter of cause and effect. Find the weakest links in a logistic chain, and exploit these to a maximum or even better: eliminate those obstacles. By doing this, “the goal” comes in sight automatically: a very profitable business.
This is in a nutshell the Theory of Constraints (TOC), as developed by the physicist Dr Eliyahu Goldratt (1947-2011)

Though the concept looks simple, implementing it is not. In many cases it is forgotten (or seen as to difficult) to include the whole supply chain and the marketing strategy. Maybe this explains why there are not so many companies in Europe, who use the TOC as guiding principle. However, the application of TOC for project management and within hospitals brings this improvement method again in the spotlight.

At first sight, the plea of Dr Eliyahu Goldratt for a “Viable Vision” on the website of the Goldratt Group reminds me a bit of Dr Phil McGraw. After all, also this popular psychologist and television host claims that he can find simple solutions for complex problems. It would however be a pity if companies would dismiss the TOC as being unrealistic. That is because this ‘bottleneck theory’ really does cut ice.

Goldratt’s response to the 2008 crisis
In a video message of 9 minutes Eli Goldratt points out that the current economic crisis shows that companies have not been able to “immunize” themselves against dramatic changes. Their predominant panic reaction: cost savings, freeze investments, and laying off workers.

Not the right track, thinks Goldratt. This becomes even more obvious from other video presentations by him. Cost reduction works only temporarily, with a limit of having a turnover that equals zero! In addition, cutting expenses and reducing the work force will lead to instability, and will put pressure on the relation with the business partners.

The holy grail of an ever flourishing company, which is both growing ánd stabile, therefore seems to be further away today then ever before.  To accomplish an ever flourishing state, throughput and sales should continuously increase at a much higher rate then the operating expenses. But, how to reach that goal in a market where consumers are hesitating to buy your products?

Unfortunately, Goldratt can’t give an appropriate answer in a few minutes. Undoubtedly he would recommend a combination of mapping causes and effects, and implementing the TOC as discussed on this page.

Goldratt claims that by finding and taking the correct actions, it is possible to generate more cash then ever before. And he goes even one better then that: it is possible to achieve results in weeks. So, the assumption that improvement projects can only deliver after a period of years is wrong, he says.

This seems all very optimistic, and maybe Goldratt only aims to provoke. However, one aspect of his message seems clear: cost reduction must not go at the expense of business process improvement and innovation. Otherwise the result will only be a downward spiral.  No cost reduction at all during recession periods seems however unrealistic to me. But, at all time, the intentions should be clear to the employees and the suppliers. That way, the stability of the company will not be at risk.

Inherent Simplicity
'The more complex a system is, the more profound it's inherent simplicity', says Goldratt. In short, his reasoning is as follows. Managing of supply chains seems complex. Therefore those chains are often split up in parts, which are controlled by departments and/or by business partners. Big amounts of intermediate stock will result. The reason for that: There are a lot of dependencies in the supply chain, which reduce the degrees of freedom. Therefore, local optimization is an impossibility!

The good news: this can be turned into advantage. It is sufficient to control a number of critical points! So, the more complex a supply chain is, the more simple it is to manage it. If causes and effects are mapped, then it will often turn out that only one or two things have a leverage function. By exploiting these bottlenecks maximally, and by subordinating the other business processes to them, the efficiency of the supply chain as a whole can be improved dramatically.

Hidden bottleneck
The bottleneck can be an existing step, which should then be pampered.  It can however also be that the biggest constraint is a business process which turns out to be based on wrong assumptions. Such a ‘hidden’ bottleneck can be elevated bij making radical changes, such as introducing replenish-to-consume everywhere in the supply chain.

Goldratt believed so strongly in his own Theory of Contraints (TOC) that during the last years he challenged companies to let his consultants examine if a “Viable Vision” is possible.

A Viable Vision means that the profit of a company can equal the current turnover within four years. If Goldratt Consulting thinks that is achievable, they will offer a TOC implementation contract, which includes that a significant amount of the consultancy costs only have to be paid, if the Viable Vision is reached. The idea behind this, is to make “an offer that can't be refused”. However, there is one catch: you are committed to a contract of four years.

In 2005 Goldratt Consulting reported that, worldwide, 28 companies had signed a Viable Vision contract.

History
De TOC has had a big influence on planning and scheduling methods and related software. That alone is already enough reason that every company should at least know the history and principles of the ‘bottleneck theory’.

Dr Eliyahu Goldratt was originally a physicist and philosopher. At the end of the seventies he developed a new scheduling approach, because the existing methods only led to 'local optima'. Although intermediate products were produced as efficient as possible, this was done in large batches. That only creates large amounts of stock, argues Goldratt, because there is always a next step in the supply chain, which might not have enough capacity.

Therefore, Goldratt focused on creating a maximum throughput in the whole production chain. That maximum is determined by the weakest link, the bottleneck. The schedule for this constraining step should be leading. All the other work should be subordinated to the bottleneck, to exploit it maximally.

Goldratt specified this idea by developing scheduling software, named Opt. Later this software package was sold to the Scheduling Technology Group (STG).

After that, Goldratt concentrated on giving advice, and founded the Avraham Goldratt Institute (AGI) in the eighties.

In 1998, Goldratt retired, but only temporarily. In 2002 he made a comeback with the Goldratt Group, which spans training, marketing and consultancy. The last mentioned activity is carried out by Goldratt Consulting, be it that implementations of the TOC are passed on to external consultants. Otto van der Zeeuw is director of one of the certified partners. ‘We can carry the load during TOC-projects', he says. 'However, the customer makes a contract with Goldratt Consulting.' 

Novel
Goldratt became well-known, after publishing the bestseller “The Goal” in 1984, This management book is a novel (!) about plant manager Alex Rogo. Thanks to hints from management guru Jonah (which can be seen as Goldratt himself), Rogo realizes that the main goal of his factory is to make profit. That aim can only be achieved if the bottlenecks in his production chain are exploited fully.

The goal is very readable. The sequel, “The haystack syndrome” however is far more complex. That book explains how a scheduling system can be developed, based on the TOC. This can be done by letting the bottleneck dictate the rhythm of the production, like a drum (see TOC: the  jargon).

The drum doesn’t  necessarily have to be a machine of limited capacity. Sometimes the true constraint is simply the amount of orders. Goldratt’s book “It’s not luck”, published in 1994, therefore focuses on the market as bottleneck, see also the case Fleetguard Filters.

Van der Zeeuw gives another example of the market as a bottleneck.  'The Californian company Zycon produces printed circuit boards. By applying the TOC, they reduced their delivery time from four weeks to one week. Their goal was however not reached, until they started to use the shorter delivery time as a competitive advantage. When someone wanted to receive their boards in one week, they had to pay quadruple. At that time, this was a totally new concept. Nowadays, this kind of price differentiation has become quite common in electronic industry.’

Expansion
Goldratt published more then ten books. Another important one is “The Critical Chain” (1997), which is about the application of TOC to project management. The book “Necessary But Not Sufficient” (2001) is about the use of ERP-software: That is necessary, but you should in addition apply the TOC within the whole supply chain.

The successive book titles demonstrate the expansion of the Theory of Constraints from production to marketing and project management, and finally to supply chains and even human behavior. In one of his latest books, “The Choice” (2008), Goldratt explains that sometimes even we ourselves can be the bottleneck, because there are several mind-blocking things which prevent us to find ground breaking business opportunities! The “Viable Vision” offer, mentioned earlier, also demonstrates the expanded reach of the TOC. After all, the aim of a Viable Vision project is to improve not only processes within an isolated company, but also the relation with the suppliers and customers.

Implementation partner
'Who thinks about implementing the TOC, can of course knock on our door’, says Van der Zeeuw . 'However, I think it is best when Eli Goldratt himself persuades you. This is possible when you visit a Viable Vision Offer Event.’

Consultants of the Goldratt Group will then investigate if a Viable Vision Offer is possible for your company. ‘If not, the will not offer a less lucrative contact', assures Van der Zeeuw. 'If there is a Viable Vision, a nine day management program could follow, on payment. The intended implementation partner will then already be present. The aim of the nine day program is to prepare the implementation, after that the contract will be drawn up. Part of that contract will be that a large part of the fee only has to be paid if the profit equals the current turnover in four years. In some cases it is however agreed that part of the bonus is paid, if the improvement is less.’

Medium-sized companies
Until now, the majority of the companies who snap are medium-sized. Van der Zeeuw: 'To achieve a Viable Vision, it is a necessary that we can examine and adapt the complete supply chain. Maybe, for large companies that is demanding to much.’

Patrick Hoefsmit¹ is managing director of Goldratt Consulting Europe. 'TOC-implementations are often done to locally, for example within one department’, he says. ‘Therefore we have developed the Viable Vision Offer, to encourage companies to bring the TOC to a higher level. What we see, is that relieving a bottleneck in a production chain is often their final step. After that, you should however continue with the constraint which is then limiting your profit the most. And that bottleneck could not only be a machine, but also your marketing strategy or even the way you replenish your distributors.’

Thanks to the better logistics due to the TOC, it becomes for example possible to switch to just-in-time delivery or vendor-managed inventory. Hoefsmit: 'You should convince your distibutors and retail customers that they are not buying products of you, but services.’

Lean manufacturing
TOC principles are very widely applied, but often under the umbrella of another improvement method like Lean or Six Sigma.  The number of companies that use the TOC as their leading strategy, as compared to for example Lean, is rather small.

'Lean has a number of similarities with the TOC, like reducing inventories and just-in-time production’, Van der Zeeuw reacts. ‘An important difference is however, that the TOC has more focus. It concentrates on the things which deliver most benefit after improvement.’

'Most of our TOC implementations we have done in Germany’,  he continues. ‘In the Netherlands for example, the TOC is less popular. I think that is because it is difficult to choose for something different then others. For the same reason, it is not so easy as consultancy to bring TOC to the market. In addition, we should acknowledge blame ourselves. In the past we made within five days an action plan, which was then handed over. Sometimes that went well, but in other cases companies messed things up. That’s why we changed our approach. Now we stay involved during the complete duration of the implementation.  For a Viable Vision project that is even four years.’

Strategy & Tactics
Summarizing: In the beginning the TOC was primarily used on the shop floor, later the application broadened to supply chains and constraints in business-relations. Besides that, increasing attention is given to strategy: what to change, in what direction and how do you communicate about that.  This can be done by developing a strategy and tactics tree, and/or by building logical maps to interconnect causes and effects. These tools can in theory also be used in combination with other improvement methods, e.g. with TOC to determine the strategy and with Lean manufacturing or Six Sigma for filling in the ‘tactics’.
Nevertheless the mapping tools mentioned above are clearly connected to the original TOC ideas. Everything around TOC remains based on thinking logically and sorting out causes and effects. The fact is, that a ‘cause’ can also be a future tactic under consideration.

In one of his latest books, “The Choice” (Japanese version), Goldratt writes in the preface: "All my work is based on the conviction that the underlying concepts and methods in the hard sciences can and should be applied in the social sciences".
In "The Choice" Goldratt proves to his daughter – she has a PhD in organizational psychology – that simple cause-en-effect relations can explain why some organizations are successful while others are not.
Goldratt passed away on june 11th, 2011, see our in memoriam.

¹) Patrick Hoefsmit left Goldratt Consulting in 2007 and started his own company.

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