Theory of Constraints: The Best Methodology for System Improvement?
In their groundbreaking book The Goal: A Process of Ongoing Improvement, authors Eliyahu M. Goldratt and Jim Cox introduced Goldratt’s theory of constraints using a fictional story that reads more like a thriller than a dry business textbook.
The novel starts by introducing Alex Rogo, a stressed-out and over-worked factory manager who gets a visit from his superior, Bill Peach. His boss lets him know if the plant does not improve in the next three months, the company will be forced to close it. The plant is rife with problems: overflowing inventory, late shipments, and backorders piling up. Struggling to come up with a plan to save his plant, Alex recalls a random encounter at O’Hare airport he had with his old college physics professor, Jonah.
During their conversation, Jonah’s questions about automation and its effect on productivity cause Alex to call into question his plant’s true productivity. Remembering this conversation, Alex contacts his former professor and through a series of brief but illuminating consultations, he introduces Alex to several new concepts, the primary one being the theory of constraints.
In summary, the theory of constraints is a five-step process that drives improvements by identifying bottlenecks (constraints), fixing them, and then repeating the process for the next constraint. As defined in the book, a bottleneck is any resource whose capacity is equal to or less than the demand placed upon it. A non-bottleneck is any resource whose capacity is greater than the demand placed on it (Goldratt & Cox, 1984). While the book uses the assembly line to demonstrate the concept of constraints, it’s important to know that constraints can encompass multiple types:
Jonah then introduces Alex to three non-traditional metrics to measure the effectiveness of the new process improvement methodology: Throughput, or the rate at which the system generates money through sales. Inventory, or all the money the system has invested in purchasing things that it intends to sell. Operational expenses, or all the money the system spends to turn inventory into throughput (Goldratt & Cox, 1984).
As the story progresses, Alex and his management team implement the new system, eventually improving operational speed, profitability, and true productivity. He ends up saving the plant and being promoted to a senior position to help other plant operators implement the TOC approach.
While there are similar process business improvement systems out there such as lean and six sigma, the theory of constraints can is the most versatile when compared to other system improvement methods because it helps management focus on what’s important, it is easy to measure progress, and results are often seen quickly.
It helps management focus on what’s important
The first reason the theory of constraints is superior to other methodologies is that it helps management focus on what’s important. In the book, Alex figures out that in the case of his company Unico, “the goal” is to make money. Jonah provides further guidance on focusing on what’s important when he says “Alex, I have come to the conclusion that productivity is the act of bringing a company closer to its goal. Every action that brings a company closer to its goal is productive. Every action that does not bring a company closer to its goal is not productive.” Goldratt & Cox, 1984).
Jonah’s statement about productivity can easily be applied to other functional parts of a system. By clearly defining what is important, i.e., that every action that brings a company closer to its goal is productive while everything that does not is unproductive, it gives management a simple and consistent standard on which to weigh decisions. Each decision can be evaluated against the standard: Does this help us to meet our goal?
It provides a simple method for measuring success
The common-sense approach to analyzing a system for bottlenecks, improving them, and repeating the process repeatedly leads us to our second point. The theory of constraints is easier to use because it provides a simple method for measuring and balancing success.
As noted earlier in the article, the three metrics used to track the effectiveness of TOC are throughput, inventory, and operational expenses.
These are not only measurements of the effectiveness of TOC but are used, along with market demand, to properly balance flow through a system. According to Goldratt’s TOC, organizations must balance three different metrics for system improvement. Not enough/too much inventory or operational expenses are not only ineffective, but they can also harm throughput.
Inventory and operating expenses are ultimately dependent on how much throughput there is in the system. Since reductions in inventory and operating expenses ultimately affect throughput, the most potential for improvement in the system is to increase throughput as much as the market will support, while also trying to reduce reducing inventory and operating expenses as much as possible while still maintaining high throughput.
By balancing all three metrics and focusing on the five steps, operational efficiency can be achieved and tracked over the long run.
You see results fast
Utilizing the TOC also gets results fast. By focusing on the biggest constraint first, exploiting it, and then moving on to the next constraint, improvement is seen as soon as the first constraint is fixed.
After the first constraint is removed, throughput through the system will increase, inventory drops, and operating expense starts to decrease as efficiency raises. By attacking the biggest constraint first, the most benefit is realized first, a significant benefit of using the TOC.
What about other methodologies?
There are other methodologies out there, two that come to mind are Lean and Six Sigma. The problem with comparing them to the TOC is they are built for different goals. For example, Lean is about adding value and eliminating waste, Six Sigma is about the iterative approach to improving quality and reducing defects. TOC is about improving throughput, which over time reduces inventory and operating costs as a benefit of accelerating throughput. Value and quality are the purposes of Lean and Six Sigma, while both are byproducts of implementing the TOC, with the added benefit of speeding up the rate at which the company generates money through sales.
Conclusion
While there are many methodologies in the business world for improving processes, the Theory of Constraints is the most versatile when compared to others because it helps management focus on what’s important, it is easy to measure progress, and results are often seen quickly.
Goldratt, E. M., & Cox, J. (2016). The goal: A process of ongoing improvement. London and New York.
