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Theory of Contraints

Posted on June 16, 2010 in Articles

Theory of Contraints (TOC) is a philosophy attributed to the pioneering work of Dr. Eli Goldratt in 1986.  In the 1980s, while Asia was focusing on setting up factories and product quality improvements, the West embraced TOC which linked system improvements to the bottom line.

A key premise in this theory is that the rate of revenue generation is limited by at least 1 constraining process or bottleneck.  Hence, to increase overall throughput or revenue generation, we must treat the bottleneck.

What is a constraint or bottleneck?  It can be the market (eg not big enough), a policy constraint (eg must sell all products at all cost even those with thin or negligible profit margin), or an internal resource constraint (eg lack of competency, insufficient capacity).

How to break the constraint?

The following 5 focusing steps are prescribed:
1.   Identify the constraint (bottleneck)
2.   Exploit the constraint (break the constraint)
3.   Subordinate all other processes to the above
4.   Elevate the constraint (invest in permanent fix)
5.    Repeat cycle from step 1 again.

TOC practitioners recognize that once a constraint has been addressed, another would be generated in its place.  Thus, the 5 focusing steps must be a continuous cycle.  Don’t let inertia become the constraint!

Another key concept in TOC is that of Throughput Accounting.  Unlike traditional cost accounting, throughput accounting views inventory as a cost and not an asset.  A practical view, since inventory does not equate to revenue, and inventory on the shelf, with time, leads to obsolescence and depreciation.

It is insane for us to expect breakthrough results if we do the same things, in the same way, each day.  Why?  Because nothing has changed!  For any improved performance, there must be changes.  TOC provides the answers to these fundamental questions:
- What to change?
- To what to change?
- How to cause the change?

Yes, do recognize and break the constraints that paralyse us, with the first step being the constraint between our ears – a closed mind, the lack of imagination, and rationality.  Which reminds me that I’ll have to play Queen’s I Want to Break Free as an anthem and reminder!

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