What is Theory of Constraints?
Theory of Constraints (TOC) is a business improvement methodology that has transformed manufacturing and other industries and sectors worldwide over the last 40 years.
It first emerged as a management philosophy based on Eli Goldratt’s influential business novel, The Goal, published in 1984.
In The Goal, Goldratt uses the example of a manufacturing plant facing closure to explain why traditional efficiency improvement methods fail.
He introduces the TOC approach to solve many common inventory and production management problems that bring manufacturing operations to the brink of ruin, including:
- poor manufacturing plant flow
- too much overtime
- slow throughput
- poor on-time performance, and
- flawed cost accounting
Everything we do at Montera is based on the tenets of TOC: it’s the basis for our Flow Management System methodology, powered by Roadrunner software, that we use to deliver big step improvements for manufacturers worldwide.
About TOCICO
Since the publication of The Goal, Theory of Constraints has continued to grow, evolve and advance management best practices.
Today, the Theory of Constraints International Certification Organization (TOCICO) develops and administers certification standards and facilitates the exchange of latest developments in TOC.
A global not-for-profit organization, TOCICO was established in 2001, with Montera CEO Jack Warchalowski and Executive VP Duncan Patrick as founding members.
TOCICO defines Theory of Constraints as:
A holistic management philosophy developed by Dr. Eliyahu M. Goldratt that is based on the principle that complex systems exhibit inherent simplicity, i.e., even a very complex system made up of thousands of people and pieces of equipment can have in any given time only a very, very small number of variables – perhaps only one (known as a constraint) – that actually limits the ability to generate more of the system’s goal.
What is a constraint in TOC?
As the name indicates, TOC philosophy revolves around the concept of constraints as limiting factors in achieving goals. TOCICO’s TOC dictionary defines constraint as:
The factor that ultimately limits the performance of a system or organization. The factor that, if the organization were able to increase it, more fully exploit it, or more effectively subordinate to it, would result in achieving more of the goal.
3 main types of constraints
Systems usually have three types of constraints that affect their ability to reach their goals:
- Capacity
- Market (demand is not sufficient to sustain the required growth of the system.)
- Time (response time is too long, jeopardizing the system’s ability to meet its current commitment to its customers or win new business)
Theory of Constraints applications
TOC techniques are applied in a manufacturing setting to:
- Increase productive capacity
- Improve on-time delivery
- Reduce inventory
- Reduce costs, and
- Increase net profit
What problems can TOC solve?
In manufacturing, TOC solves two big problems:
- Making too much of what you don’t need and not enough of what you do need
- Focusing your improvement efforts in the wrong areas
Demand-Driven Replenishment for supply chain management
Demand Driven Replenishment (DDR) is the solution to the first problem: making the right quantity of the right product.
DDR is a Theory of Constraints approach to supply chain management that enables a better response to customer demand in real-time.
It links material availability (raw material, purchased parts, manufactured components and finished goods) directly to actual consumption by establishing strategically located inventory buffers that dynamically adjust (up or down) based on actual consumption.
These buffers are a combination of:
- in-stock inventory (similar to kanbans)
- inventory on the way (from your suppliers or in the plant)
This approach allows you to better manage customer demand requirements.
It accounts dynamically for changing customer orders, as well as unreliable plant and supplier performance. All at the same time.
By removing the need for forecasting and guesswork, DDR provides stability for the manufacturing operation.
Implementing DDR
Implementing DDR requires manufacturers to:
- ‘turn off’ their MRP system or Min / Max Inventory System for the purchase of raw material and purchased parts
- ‘turn off’ their forecast for the signal of “what to make” and “what to buy” and either make-to-order or make-to consumption (or both – depending on which strategy is appropriate), and
- de-couple their manufacturing flow by creating strategically placed purchased and / or manufactured component inventory buffers at:
- critical divergent or convergent points and / or
- at points in the manufacturing flow that are most susceptible to supplier or manufacturing variability.
Benefits of DDR
The most significant positive effect of DDR is that it has reduced total inventory by 30% to 50% in well over 90% of the manufacturers that we have worked with.
At the same time, it also dramatically reduces manufacturing lead time while significantly improving on-time delivery.
Focusing improvement efforts in the right areas
The second big issue we see manufacturers struggling with – focusing their improvement efforts on the right areas – calls for another TOC solution: a continuous improvement process driven by Flow Issue Reporting.
Flow Issue Reporting
Using Flow Issue Reporting (FIR) for all Work Orders to drive continuous improvement is a simple yet powerful approach.
FIR is not a replacement for Lean or Six Sigma as it does not show manufacturers how to improve nor provide a set of improvement tools.
It simply tells manufacturers WHERE to improve – to ensure the fastest achievement of significant bottom line results.
FIR tracks the biggest issues impacting the flow of orders through the entire manufacturing flow vs tracking issues that affect individual or departmental flow.
Work centre downtime reporting is only a small part of the Work Order Flow Issue Reporting process.
The biggest issues impacting flow ARE the biggest issues preventing manufacturers from achieving significant bottom line improvement.
Quite simply, shop floor supervisors or operators record the reasons why a work order is not where it is supposed to be; these reasons are then collected and put into a Pareto Diagram; management reviews these Pareto Diagrams weekly and prioritizes continuous improvement efforts.
Increasing bottom line impacts
Our experience suggests that when manufacturers use Flow Issue Reporting to drive their Continuous Improvement, the number of projects leading to bottom line impact increases from two in 10 to nine in 10.
The good news is that many manufacturing challenges can be much better managed with Theory of Constraints approaches. Specifically, Demand Driven Replenishment and Flow Issue Reporting are two essential tools that can dramatically improve your competitive position.
Manufacturing challenges? Let’s chat!