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THE THEORY OF CONSTRAINTS

What is Theory of Constraints


In the current context of globalisation, ever-expanding markets, and intense competition, firms exist not only to serve their functional purpose of production and profit, but also continuously deal with buzzwords of efficiency, productivity improvement, cutting costs and the like. At the same time, it is important to understand that efficiency does not mean sifting through a plethora of excel sheets and tweaking variables and processes to get some improved numbers on board. Concrete and structural changes are required to improve efficiency and productivity of a firm. Theory of Constraints (TOC), developed by Eli Goldratt, in 1984, is a broad management approach that is often applied across Operations management and related fields like Supply Chain management, six-sigma, and addresses structural bottlenecks or constraints that limit of performance of firms in achieving their goals. It focuses on a scientific cause and effect approach, and aims to improve systemic performance of the whole process rather than improving efficiency of its sub-parts. As long as bottlenecks exist in a system, even if the other components are performing at their optimal local efficiency, the overall system output will still be limited by the output of the bottleneck. As depicted in the illustration below Total Output Time = 5 sec

Optimal Process time = 3 sec

*Bottleneck* Process time = 5 sec

Optimal Process time = 2 sec

Understanding TOC from an Operations management perspective


A constraint is anything that limits a system from achieving higher performance relative to its purpose. According to Theory of Constraints, any firm faces a limited amount of constraints. Out of these constraints, there is always one that can be identified as the weakest link of the chain. Constraints for an organization can be internal and external. Internal constraints assume that market demand is more than the firms production, in which case, a firm must focus on internal limitations of equipment, people and policy. An external constraint requires that the firm delivers more than the market demand, and hence, an external bottleneck which may be preventing the market demand from rising, should be resolved.

Applying TOC includes a five step procedure

1. Identify the weakest system constraint, for e.g. not enough sales in the market(external) or reduced skill-set or a slow, obsolete equipment(internal) 2. Decide how to exploit the constraint improve product quality and service to tackle external constraints of market demand and internal constraint of skills can be handled by inhouse training 3. Subordinate non-constraints in the system to decisions in Step 1 and Step 2. This step focuses on exploitation of the constraint and improvement of overall system performance. Everything else assumes secondary importance. 4. Elevate the constraint focus more on getting the best out of system limitations to achieve a higher performance 5. Repeat - If the constraint has been broken in the previous steps, go back to step 1 and focus on a different constraint but do not allow inertia to set in and become a case for constraint Let us understand TOC through an illustrative example as shown in the video. A bottle of water, with an elongated narrow neck at the opening, is being emptied using three different ways. The major constraint faced here is the passage of air into the bottle as the water is being emptied. We exploit this constraint in the second and third case, by creating a vortex inside the bottle and by inserting a straw, respectively, thus ensuring smooth passage of air inside the bottle and increasing the rate of water flowing out of the bottle (which is also called throughput of a process) https://www.youtube.com/watch?v=mWh0cSsNmGY

Towards a wider understanding of Theory of Constraints


Manufacturing Processes and Project Management Theory of constraints finds typical applications in manufacturing processes and operations concepts. However, as a philosophy, it can be applied to a wider set of topics and subjects. It provides unique insights and benefits in optimising distribution of resources and supply chain, bottom-line

improvements in manufacturing and generating shorter schedules for project management as compared to traditionally planned schedules Accounting However, even when applied to conventional applications, TOC helps us find unique insights like throughput accounting. Financial health of a company is analysed in terms of inventory (finished goods or work-in-process articles for a firm), throughput (rate at which money is generated through sales) and operating expenses (cost incurred during various business processes that make finished goods). This type of accounting, as opposed to cost based accounting, makes managers make better operational decisions. Sales, Marketing and Strategy TOC can also be applied to sales and marketing which helps give firms a competitive advantage. For e.g. as mentioned earlier, if an organization faces an external constraint of reduced demand, tackling this constraint using TOC can lead to beneficial insights on marketing the product. The application of TOC to strategic planning gives managers a clear picture of company targets, individual roles and effective alignment of day-to-day activities and decision-making with overall strategic objectives of a firm. Let us take the case of a manufacturing plant assembling car parts which is being effectively managed by applying TOC. For e.g. if input parts are a constraint, additional supplier are introduced so that input capacity is optimised. Again, the constraint may shift to working of machines, in which case, schedules are arranged such that the assembly line can run for some extra hours. If one particular machine is limiting the output, then it can be replaced with new machinery. Hence, by thinking ahead and identifying the constraints, we are able to increase the plants efficiency. Conclusion We have seen how theory of constraints helps to leverage physical and logical constraints in complex organizational situations. It attacks silo-thinking by focusing on the larger picture. However, most importantly, theory of constraints helps you to develop a different and more effective perspective on organizations which helps drive structural, goal-driven performance.

References www.wikipedia.org, www.chronologist.com, www.synchronix.com http://www.shmula.com/the-theory-of-constraints-the-fundamentals/2632/ http://toolkit.smallbiz.nsw.gov.au/part/13/68/288 http://www.mindtools.com/pages/article/toc.htm http://www.isixsigma.com/methodology/theory-of-constraints/applying-theory-constraints-managebottlenecks/ http://theoryofconstraints.blogspot.in/

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