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Theory of Constraints: What’s Limiting Your Organization?

0The Theory of Constraints (TOC) is a methodology for identifying the most important limiting factor—i.e. constraint—and systematically improving it.  It was developed by Dr. Eliyahu Goldratt, introduced in 1984 book, The Goal.

TOC differs from traditional management views, in that traditional methods seek to make improvements throughout the organization.  They divide the organization into smaller, more manageable pieces.  The objective, thus, is to maximize the performance of each part, resulting in global improvement.

On the other hand, TOC takes a more focused approach.  Instead of improving everywhere, the TOC approach seeks only to improve the few variables (or constraints) that have the largest impact on the organization’s performance.  By trying to improve everything everywhere, the risk is that nothing will be improved that really counts.  TOC follows the adage “a chain is no stronger than its weakest link.”  An interesting phenomenon about chains is that strengthening any link except the weakest one does not improve the strength of the whole chain. Strengthening the weakest link produces an immediate increase in the strength of the whole chain, but only up to the level of the next weakest link.

There are 3 types of constraints that exist in an organization:

  • Capacity Constraint.  This constraint occurs when a resource which cannot provide timely capacity as demanded by the system.
  • Market Constraint.  This is when the amount of customers’ orders is not sufficient to sustain the required growth of the system.
  • Time Constraint.  This occurs when the response time of the system to the requirement of the market is too long to the extent that it jeopardizes the system’’s ability to meet its current commitment to its customers as well as the ability of winning new business.

POOGI Approach

TOC practitioners follow a 5-step approach known as Process of ongoing Improvement (POOGI).  The 5 steps are as follows:

1. Identify the Constraint.

First, identify the system;s constraint. Remember, strengthening any link of a chain (apart from the weakest) is a waste of time and energy. It is impossible to manage a constraint until you find out what it is. The good thing is it is surprisingly easy to find, once you know how to look.

2. Exploit the Constraint.

We can exploit the constraint by leveraging various Lean Management tools. Lean Management is a management philosophy based on the Toyota Production System (TPS). The objective of Lean Thinking is to eliminate everything that does not add value (i.e. “waste”) from the customer’s perspective.  The general approach to Lean is learn-by-doing and to foster a culture of continuous improvement.

3. Subordinate Everything to the Constraint.

Next, subordinate everything else to the constraint(s). By definition, any non-constraint has more capacity to produce than the constraint itself. Left unchecked, this results in bloated WIP inventory, elongated lead times, and frequent expediting/firefighting. Therefore, it is critical to avoid producing more than the constraint can handle. In a manufacturing environment, this is accomplished by choking the release of raw material in line with the capacity of the constraint.

4. Elevate the Constraint.

Once the capacity of the system is exhausted, it must be expanded by investing in additional equipment, investing in additional land, hiring people, etc.

Instinctually, we tend to gloss over the first 3 steps and jump straight to elevation. Implementing the first 3 steps properly typically exposes a minimum of 30% hidden capacity within the first few months. This capacity is available free of cost, without any investment.

5. Prevent Inertia from Becoming the Constraint.

Lastly, in step 5, prevent inertia from becoming the constraint. Once elevated, the weak link may not remain weakest. Consider elevating other resources to retain the old constraint, depending on where you wish to have the constraint in the long-term.

A new constraint demands a whole new way of managing the system. Therefore, we return to Step 1, and thus begins our journey of continuous improvement.

Rules of Thumb about Constraints

Here are general principles about TOC:

  • You will always have a constraint, so choose wisely (perhaps the most capital intensive, or energy consuming, or largest batch, or longest touch time, etc.).
  • If you identify the wrong constraint, it is easily rectified and causes no permanent damage. The POOGI process autocorrects for errors made over time.
  • The constraint may appear to shift suddenly based on product mix. However, this is often due to batching practices, rather than actual shifting of the constraint.
  • Most systems typically have one single resource constraint, such as a machine or department.
  • Permanent constraints typically include sales/marketing and R&D.
  • The constraint should eventually be stabilized. Frequently, shifting constraints cause havoc on policies, procedures, and people.

You can download an editable instructional PowerPoint about the Theory of Constraints framework here on the Flevy documents marketplace.

About David Tang

David Tang is an entrepreneur and management consultant. His current focus is Flevy, the marketplace for premium business documents (e.g. business frameworks, presentation templates, financial models). Prior to Flevy, David worked as a management consultant for 8 years. His consulting experience spans corporate strategy, marketing, operations, change management, and IT; both domestic and international (EMEA + APAC). Industries served include Media & Entertainment, Telecommunications, Consumer Products/Retail, High-Tech, Life Sciences, and Business Services. You can connect with David here on LinkedIn.

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