Login  |  Newsletter  |   News   |   Agenda   |   Search   |   Jobs   |   Forum   |   Advertize
This article: Introduction Theory of Constraints (TOC)
Source: Business-improvement.eu
TOC: The unlimited organization

^ For more articles about the TOC, use the drop down menu in the top left corner. This is the introduction article.

Introduction Theory of Constraints
The Theory of Constraints (TOC) is a business process improvement method developed from the perspective of logistic management, like Lean Manufacturing and QRM. TOC concentrates on reducing the throughput time. By optimally exploiting the bottlenecks or constraints, the efficiency of a supply chain as a whole is improved.  The Theory of Constraints was developed by consultant and management guru Dr Eliyahu Goldratt (1947-2011). His latest addition was to find business opportunities by mapping causes and effects. That way, hidden constraints can be found. 
The impact of the TOC is much bigger than one should think, regarding the relatively small number of companies which has chosen it as their main method for continuous improvement. TOC is very often applied as part of other methods like Lean, especially on a strategic level.

The unlimited organization
If production capacity or throughput is limited most by logistic problems, then the Theory of Constraints could bring relieve.  Look around in your organization: Do you see huge amounts of intermediate stock, which might be hidden if its paperwork? Then, the TOC provides the tools to get rid of it.
Initially, the TOC was primarily used to optimize production lines, in case several consecutive production steps are needed to finish the product.  Later, it turned out that the TOC works even better if the whole supply chain, thus suppliers and business partners included, becomes part of the analysis.  TOC implementations in manufacturing are primarily seen in medium-sized companies, because these have the largest grip on their supply chain.
Like Lean, Six Sigma, TPM en QRM, the TOC has grown into a general process management method. The TOC can be applied in many situations to find and remove business constraints, also outside production. In The Netherlands and the UK for example, the TOC is successfully applied by hospitals.
Generally speaking, if there is a chain of dependent events, then studying the TOC makes sense. This can also be the case in an administrative environment!

Recently, more and more attention is given to TOC-strategy: What should change within a company, and how should that be communicated. Important TOC-tools in this field are the strategy and tactics tree, and the logical maps. By structuring causes and effects, hidden constraints and thus business-opportunities can be found! This way, the TOC can very well be applied to give focus to other improvement initiatives like Lean and Six Sigma.

 

Theory of Constraints (introduction article)
TOC pampers the weakest chain
By Dr Jaap van Ede, business journalist and editor-in-chief business-improvement.eu. 
The first version of this article was published in the Dutch specialist journal PT Industrial Management. Since then, this article was regularly updated.


To make profit is not luck, but a matter of cause and effect. Find the weakest links in a logistic chain, and exploit these maximally or even better: eliminate the 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 too difficult) to include the whole supply chain and the marketing strategy. Maybe this explains why not so many companies use the TOC as their main method for improvement. However, the application 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.

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.

Cover Isn't it ObviousThe common roots of the TOC and Lean

In his article Standing on the Shoulders of Giants Goldratt explains that he learned a lot from the founders of Lean manufacturing, Henry Ford en Taiichi Ohno from Toyota. These 'giants' laid the foundation that made the development of the TOC possible.

Lean and the TOC both aim to increase the flow, says Goldratt, by continously tracing and improving rate-limiting steps. In addition both Lean and the TOC use a control system, which (1) balances the flow, (2) reduces the amount of work-in-progress and (3) as a result exposes rate-limiting steps. In Lean the control system is Kanban, in TOC this is replaced by buffer management, because this makes the shop floor more flexible (with the aim to make low volume/high mix production possible)

In his book The Choice Goldratt positions the TOC as a method which maps causes and effects, with the idea to find hidden constraints (which can also be erroneous assumptions or even mental blockages!), and ground breaking business opportunities.

When those opportuninies are found, other improvement methods like Lean can be used to elaborate them. This is the approach in Goldratt's last book, Isn't it Obvious?. The solutions in this book for a retail chain are all typically Lean: Demand driven replenishment, the use of mini-markets in warehouses, and even 'go see' how the suppliers operate.


Hidden bottleneck
A 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.

Dr Eliyahu GoldrattGoldratt’s response to an economic crisis
In a video message of 9 minutes Eli Goldratt points out that the economic crisis of 2009 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. The same approach is seen during the current crisis.

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 of 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 stable, 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 times, your intentions should be clear to your employees and suppliers. That way, the stability of the company will not be at risk.


History
De TOC has had a big influence on planning and scheduling methods and related software. That alone is already enough reason why 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 the Goldratt Consulting branch, be it that implementations of the TOC are passed on to external consultants.

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 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.

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 in relation with the suppliers and customers.

The Viable Vision offer was among others meant to stimulate companies to bring their TOC-applications to an higher level. Often, relieving a bottleneck in a production chain is their final step. After that, you should however continue with the constraint which is then limiting your profit the most. And that bottleneck cannot 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.

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 relatively small.

Lean has a number of similarities with the TOC, like reducing inventories and just-in-time production, and has even common roots. An important difference is however, that the TOC adds focus. It helps you to concentrate on the things that deliver most benefit after improvement.

Case Fleetguard Filters
Automotive supplier tackles the market as constraint

For the Indian joint-venture Fleetguard Filters Pvt Ltd, part of the American Cummins Filtration Group, their biggest bottleneck turned out to be the market!

Fleetguard makes among others heavy-duty filters and coolants, which are purchased by automotive companies like Tata Motors and John Deere. The economic recession, which is hitting the automotive sector hard since the end of 2008, was not an issue in 2006. At that moment there was however another reason why Fleetguard wished to become less dependent on the OEM-ers: Their growth rate restricted the growth rate of Fleetguard.  

Therefore in 2006 a TOC program was launched, named Samanvay, which is Indian for symbiosis (with the consumers). The goal: increasing profit, by realizing growth on the after market. The whole story can be read in the Indian journal Autocar Professional (issue may 2008).

Spare parts are bought from Fleetguard by distributors, who resell those parts to retailers. What do the distributors wish? A high return on investment. For that, the availability of spare parts should be high, without the need to keep big amounts in stock. By gratifying that wish, Fleetguard was able to substantially increase their after market sales.

During the last two years, a special kind of Vendor Managed Inventory system was built. Sales data from distributors are now automatically transmitted to Fleetguard. Then, their stock is replenished from a distribution centre. A buffer management system takes care that distributors who are relatively short of stock, will be replenished first. A distributor who orders only one item, but whose stock buffer is in red, can therefore take precedence over all the others!. When a certain part is not available for over a day, Fleetguard pays a penalty, so the article says. This way, they won a lot of goodwill.


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 also be used in combination with other improvement methods, e.g. with TOC to determine the strategy and with Lean manufacturing or Six Sigma to fill in the ‘tactics’.

The mapping tools mentioned above are clearly connected to the original TOC ideas. Everything around TOC is 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 explains to his daughter – she has a PhD in organizational psychology – how 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.

TOC jargon

Bottleneck: This is the weakest, thus throughput limiting, link in the chain from raw materials to a sold product. This bottleneck can be a certain machine that is failure-sensitive or expensive, but it can also be the amount of orders, or even the way how your products are marketed.
 
Bottleneck-exploitation: This is a cyclic process with five steps to improve the throughput rate in a chain bringing forth products:

  1. Identify the bottleneck or constraint, which is currently limiting the goal (profit) of the organization the most.
  2. Exploit this bottleneck. For example:  Don’t spill any bottleneck capacity by unnecessary disturbances or lack of supply of materials.
  3. Subordinate all other processes to the operation of the bottleneck. The production schedule of the bottleneck should be the drum. That drum provides the rhythm that all other working processes follow (see also drum-buffer-rope)
  4. Elevate the constraint, for example by investing in an extra machine.
  5. If the constraint disappeared, return to Step 1 to find a new constraint. That does not have to be a machine but could well be, for example, the distribution process.

Drum-buffer-rope principle: The production rate at the bottleneck is the drum, all other processes should follow that rhytm. To do that, the timing of all non-constraining activities is connected to the bottleneck with a rope.
Activities upstream of the bottleneck are always started a bit to early, to assure supply to the rate-limiting production step. This is realized by extending the rope with a buffer time. As a consequence, there is in general a small amount of stock in front of the bottleneck. 

Ever flourishing company: This is defined as a company which is able to combine sustainable growth with stability. To achieve that, sales should continuously increase much faster then the operational costs.

Strategy and tactics tree
De strategy and tactics tree is a tool to determine what to change, in what direction, and how to cause the change. With ‘strategy’ the goals of the organization are meant (strategy=why), whereas ‘tactics’ refers to things which are done to attain the goals (tactics=how)

According to Goldratt, strategy is not a single statement. It is needed to develop an hierarchical framework, with goals and connected sub-goals. This is the strategy tree. The fulfillment of strategies on a lower level is a condition for the fulfillment of ‘higher’ strategies. The higher in the tree, the less specific and thus more general the nature of the strategies become.

A strategy and tactics tree is built from blocks, that have two layers: a strategy on top, and a matching tactic beneath it. So, on all levels, the why and the how are connected in the tree!. Completely on top is the mission of the company, the top-strategy. After that, the strategy branches to sub-strategies and matching sub-tactics, sub-sub-strategies and sub-sub-tactics and so on.

This logical elaboration shows the scientific background of Goldratt.  For one Strategy on level x (Sx) there is exactly one matching Tactic (Tx), though there can be alternatives. The fulfillment of one or more Strategies on level x is a condition for fulfilling Strategies and Tactics one level higher (Sx-1, Tx-1). So, Tactics at the level x can be seen as more detailed descriptions of the Tactics al level x-1.

A strategy and tactics tree is also be useful to communicate about intended changes in an organization. When people see why change is needed, then they are much more willing to cooperate.

In december 2007, I asked Goldratt if a strategy and tactics tree is comprehensible for everyone within an organization. ‘That is a good question’, he reacted. ‘Only a few years ago I didn’t know the answer myself. By now, I am convinced that everybody understands the logic, if the tree is explained well.’

It is important that the changes yield benefit quickly. As an example, Goldratt names the control of the amount of work-in-progress during project management. ‘This can be compared by leading elephants to a door. The quickest way to do that, is to form a row of elephants. With projects that is no different! When you start too many projects, most projects will finish late, because all the time your employees have to skip from one subject to another. So, working on less projects is both easier and faster. Only after one week , your employees will experience that themselves.’


Case Vitatron: TOC for project management
Software-department sets the pace for developing pacemakers

TOC is not only suitable for production and supply chains. Since 2003, Vitatron applies the bottleneck theory to project management. ‘The development time of our pace makers was thereby reduced with more then 50%’, says Menno Graaf, project planner TOC at Vitatron. 'In addition, the projects are now finished as scheduled. In the beginning our marketing department needed time to get used to that!’

Until 2001, Menno Graaf worked for Lucent Technologies. This was the first company which applied TOC for project management on a large scale. ‘At that time I was responsible for the rollout in Europe. But when Lucent was beginning to feel the pain of the recession in the Telecom-sector, I started to look for another job. It fitted well, when I found out that Vitatron wished to get going with TOC in their R&D department. They asked me to carry the load, which I accepted.’

Joe
With conventional project management, human capacity is often seen as infinite.
Graaf: 'If there is only one “Joe” who can do a certain task, still there the are several projects scheduled for that person, like there is more then one Joe. The reasoning behind that is, that it should at all times be prevented that Joe has nothing to do.’

However, two things are then overlooked. ‘First, this way no single project will finish on time. Second, if a person does three things at the same moment, the time to do that more then triples.’

Therefore, the progress of the projects starts to resemble cars which are moving slowly because there is a traffic-jam. The asphalt is used very efficiently, but there are simply too many cars on the same spot which impede each other. This is the reason why not many cars will arrive at their destination on time.

Critical chain
With a planning according to the critical chain approach, the result is much better. Starting point is the true capacity of the people in the R&D-department. ‘The method resembles TOC production scheduling, because it uses the drum-buffer-rope principle. To find the bottleneck and thus the drum, we determined which group of people is loaded most heavily with work. That turned out to be our software group.’

During the development of pace-makers, the software group of Vitatron sets the pace
^ During the development of pace-makers, the software group sets the pace


Since the implementation of the TOC, the software group sets the pace for the product development projects. All other activities are subordinated to their activities. ‘This means that for the none-bottleneck activities, there is some overcapacity. If those people don’t have work for a while, they are doing other things within our company.’

Projects resemble production processes, because there are several consecutive steps needed to complete them. However, there are differences as well. ‘With project management the bottleneck is more or less deliberately chosen. In addition, we don’t want to elevate the constraint. In our case that could be easily done by hiring extra software-developers.’

In the beginning, it was thought that it was relatively hard to use the TOC for project management. Now it seems that there is more interest in this subject then for ‘ordinary’ TOC. ‘Maybe that is because there are also other methods for improving production chains. TOC is the only method which addresses project management as well.’

The production of the pacemakers is outsourced to Medtronic, the parent company of Vitatron. ‘To improve their operations, they use primarily Lean manufacturing and Six Sigma. As a consequence their production processes are quite efficient, but I am convinced that further improvement is possible if they start using the TOC. Unfortunately I am only a small cog in the huge Medtronic-group, so it’s not easy for me to convince the senior management. It’s a pity that we therefore can’t qualify for a Viable Vision project of Goldratt Consulting. To qualify it is needed that the TOC can be applied to a complete company, with its surroundings.’


Do you need help with the implementation of TOC?

Referral to this article on internet?
Use this link: http://www.business-improvement.eu/toc/TOC_eng.php