Theory of Constraints

Theory of Constraints
Dr. Seth Bates Dr. Seth Bates
Advanced Manufacturing Methods Advanced Manufacturing Methods
Department of Technology Department of Technology
College of Engineering College of Engineering
Seth P. Bates Seth P. Bates The Theory of Constraints The Theory of Constraints page page 2 2
Eliyahu
Eliyahu
Goldratt
Goldratt
The Theory of constraints was developed and

The Theory of constraints was developed and
popularized by manufacturing guru
popularized by manufacturing guru
Eliyahu
Eliyahu
M.
M.
Goldratt in 1984. Most people are first exposed to
Goldratt in 1984. Most people are first exposed to
the concepts through his book
the concepts through his book
The Goal.
The Goal.
In 1986
In 1986
Eliyahu
Eliyahu
Goldratt formed the
Goldratt formed the
Avraham
Avraham
Y.
Y.
Goldratt Institute. This institute was formed to inform
Goldratt Institute. This institute was formed to inform
people about TOC (The Theory of Constraints).
people about TOC (The Theory of Constraints).
Dictionary Definition of a Constraint
Dictionary Definition of a Constraint
1
1
the act of
the act of
constraining
constraining
2
2
the state of being checked, restricted, or compelled to
the state of being checked, restricted, or compelled to
avoid or perform some action
avoid or perform some action
<the
<the
constraint
constraint
and monotony of a monastic life
and monotony of a monastic life
--
--
Matthew Arnold>
Matthew Arnold>
3
3
a
a
constraining
constraining
condition, agency, or force :
condition, agency, or force : CHECK CHECK
<put legal
<put legal
constraints
constraints
on the board's activities>
on the board's activities>
TOCs
TOCs
Definition of a Constraint
The most common question about the Theory of
The most common question about the Theory of
Constraints (TOC) is, "Huh?"
Constraints (TOC) is, "Huh?"
Eli Goldratt defines a Constraint as, 'Anything that limits a
Eli Goldratt defines a Constraint as, 'Anything that limits a
system from achieving higher performance verses its
system from achieving higher performance verses its
goal.
goal.
One definition used by Eli Goldratt for TOC (edited) is:

One definition used by Eli Goldratt for TOC (edited) is:
A Thinking Process that enables people to invent

A Thinking Process that enables people to invent
simple solutions to seemingly complex problems.
simple solutions to seemingly complex problems.
'
'
Here's another definition (from Larry Leach):
Here's another definition (from Larry Leach):
http://www.
http://www.
srv
srv
.net/~
.net/~
lleach
lleach
/TOC/defined.
/TOC/defined.
htm
htm
The Theory of Constraints states that every system must have at The Theory of Constraints states that every system must have at
least one constraint limiting its output. least one constraint limiting its output.
Consequences of the Theory: Consequences of the Theory:
1. The more complex the system, the less independent process 1. The more complex the system, the less independent process
paths exist, so the lower the number of constraints. (Usually, paths exist, so the lower the number of constraints. (Usually,
complex systems have only one constraint at a given time.) complex systems have only one constraint at a given time.)
2. A system of optimum processes can not be an optimum 2. A system of optimum processes can not be an optimum
system. system.
3. An optimum system runs the constraint (or bottleneck) at 3. An optimum system runs the constraint (or bottleneck) at
optimum capacity (focused on the goal of the system), and all optimum capacity (focused on the goal of the system), and all
other process steps must have excess capacity. other process steps must have excess capacity.
TOCs
TOCs
A process or process step that limits throughput.

A process or process step that limits throughput.
Anything that limits a system from achieving

Anything that limits a system from achieving
higher performance versus its goal.
higher performance versus its goal.
A constraint is a factor that limits the system

A constraint is a factor that limits the system
from getting more of whatever it strives.
from getting more of whatever it strives.
What is TOC?
What is TOC?
The core idea of the Theory of Constraints is that every real sy The core idea of the Theory of Constraints is that every real system stem
such as a profit such as a profit- -making enterprise must have at least one constraint. making enterprise must have at least one constraint.
The TOC is a thinking process that enables people to invent simp The TOC is a thinking process that enables people to invent simple le
solutions to seemingly complex problems. solutions to seemingly complex problems.
The Theory of Constraint states that every system must have at The Theory of Constraint states that every system must have at
least one constraint limiting output. least one constraint limiting output.
There is no choice in the matter; either you manage the constrai There is no choice in the matter; either you manage the constraints nts
or they mange you. The constraint will determine the output of or they mange you. The constraint will determine the output of the the
system whether they are acknowledged and managed, or not. system whether they are acknowledged and managed, or not.
How does TOC help companies?
How does TOC help companies?
Focuses improvement efforts where they

Focuses improvement efforts where they
will have the greatest immediate impact on
will have the greatest immediate impact on
the bottom line.
the bottom line.
Provides a reliable process that insists on

Provides a reliable process that insists on
follow through.
follow through.
Finding the focal point
Finding the focal point
Before a company can properly focus,

Before a company can properly focus,
one necessary condition is that they
one necessary condition is that they
answer the following question:
answer the following question:
What is the goal of a for
What is the goal of a for
-
-
profit enterprise?
profit enterprise?
The Goal
The Goal
To make money now and in the future.
To make money now and in the future.
The Goal
The Goal
(more)
(more)
Some would say that the goal of a

Some would say that the goal of a
company is:
company is:
1)
1)
To satisfy customers.
To satisfy customers.
2)
2)
To provide satisfying jobs for employees.
To provide satisfying jobs for employees.
The Goal
The Goal
(more)
(more)
TOC Recognizes that only the owner can

TOC Recognizes that only the owner can
choose the goal, however, once chosen,
choose the goal, however, once chosen,
the other two goals become conditions to
the other two goals become conditions to
achieving the goal.
achieving the goal.
Measuring Progress
Measuring Progress
Once the goal is identified, a necessary

Once the goal is identified, a necessary
condition to success in achieving the goal
condition to success in achieving the goal
is to identify which measurement(s) will be
is to identify which measurement(s) will be
used to judge progress.
used to judge progress.
What measurements should we use?
(Conventional Wisdom)
(Conventional Wisdom)
Net Profit?
Net Profit?
Efficiency?
Efficiency?
Utilization?
Utilization?
ROI
ROI
(Return On Investment)
(Return On Investment)
?
?
Cash Flow?
Cash Flow?
(TOC Wisdom)
(TOC Wisdom)
Throughput
Throughput
Inventory
Inventory
Operating Expense
Operating Expense
What is: Throughput
What is: Throughput
The rate at which the system generates money through

The rate at which the system generates money through
sales minus raw materials and and purchased parts.
sales minus raw materials and and purchased parts.
All the money received from customers minus raw

All the money received from customers minus raw
materials cost.
materials cost.
The rate at which the system makes money(sales minus

The rate at which the system makes money(sales minus
totally variable costs). Direct labor should not be
totally variable costs). Direct labor should not be
deducted in calculating Throughput. Sales are only
deducted in calculating Throughput. Sales are only
recognized when money is available to the firm. That is,
recognized when money is available to the firm. That is,
production for inventory is not a part of throughput
production for inventory is not a part of throughput
What is: Inventory
What is: Inventory
All the money the system has invested in

All the money the system has invested in
purchasing things which it intends to sell.
purchasing things which it intends to sell.
Some insights
Some insights
:
:
Inventory is a liability, not an asset.

Inventory is a liability, not an asset.
Raw materials and finished goods are inventory.

Raw materials and finished goods are inventory.
Machines and fixtures (if owned) are inventory.

Machines and fixtures (if owned) are inventory.
Scrap material that is to be sold is inventory until sold.

Scrap material that is to be sold is inventory until sold.
What is: Operating Expense
What is: Operating Expense
All the money the system spends in order to

All the money the system spends in order to
turn inventory into throughput.
turn inventory into throughput.
All employee time is operating expense.

All employee time is operating expense.
Depreciation of a machine is a operating expense.

Depreciation of a machine is a operating expense.
Scrap material thrown away.

Scrap material thrown away.
All expenses not deducted in arriving at throughput.

All expenses not deducted in arriving at throughput.
This includes direct labor and all operating and
This includes direct labor and all operating and
maintenance expenses.
maintenance expenses.
The Five Focusing Steps
The Five Focusing Steps
Identify a system's constraints

Identify a system's constraints
Decide to exploit the systems constraints

Decide to exploit the systems constraints
Subordinate everything else to the above decision

Subordinate everything else to the above decision
Evaluate / Elevate the systems constraints

Evaluate / Elevate the systems constraints
If in the previous steps a constraint has been broken, go

If in the previous steps a constraint has been broken, go
back to step 1. That is, find a new constraint.
back to step 1. That is, find a new constraint.
Warning: Do not allow inertia to cause a system

Warning: Do not allow inertia to cause a system
constraint.
constraint.
Step 1:
Step 1:
Identify the Systems Constraint(s)
Identify the Systems Constraint(s)
In order to manage a constraint you must first

In order to manage a constraint you must first
identify it. In Eli
identify it. In Eli
Goldratts
Goldratts
book
book
The Goal,
The Goal,
a
a
machine known as the NCX10 was identified as
machine known as the NCX10 was identified as
the constraint.
the constraint.
Step 2:
Step 2:
Exploit the Constraint
Exploit the Constraint
Once the constraint is Identified, the next step is

Once the constraint is Identified, the next step is
to focus on how to get more production within
to focus on how to get more production within
the existing capacity limitations. Goldratt refers
the existing capacity limitations. Goldratt refers
to this as
to this as
exploiting the constraint
exploiting the constraint
.
.
An example of this from
An example of this from
The Goal
The Goal
was when the
was when the
company and the labor union agreed to stagger
company and the labor union agreed to stagger
lunches, breaks, and shift changes so a machine
lunches, breaks, and shift changes so a machine
could run during times it previously sat idle.
could run during times it previously sat idle.
Step 3:
Step 3:
Subordinate Everything to the Constraint
Subordinate Everything to the Constraint
Exploiting the constraint does not insure that the

Exploiting the constraint does not insure that the
materials needed next by the constraint will
materials needed next by the constraint will
always show up on time.
always show up on time.
This is often because these materials are waiting
This is often because these materials are waiting
in order at a non
in order at a non
-
-
constraint resource that is
constraint resource that is
running a job that the constraint does not need
running a job that the constraint does not need
yet. Subordination is necessary to prevent this
yet. Subordination is necessary to prevent this
from happening.
from happening.
Step 4:
Step 4:
Evaluate / Elevate the Constraint
Evaluate / Elevate the Constraint
After the constraint is identified, the available

After the constraint is identified, the available
capacity is exploited, and the non
capacity is exploited, and the non
-
-
constraint
constraint
resource have been subordinated, the next step
resource have been subordinated, the next step
is to determine if the output of the constraint is
is to determine if the output of the constraint is
enough to supply market demand.
enough to supply market demand.
If so, there is no need to elevate because this
If so, there is no need to elevate because this
process is no longer the constraint of the
process is no longer the constraint of the
system. If not, elevate by adding resources.
system. If not, elevate by adding resources.
Step 5:
Step 5:
Go Back to Step 1
Go Back to Step 1
Step 5 is to go back and repeat step 1 and

Step 5 is to go back and repeat step 1 and
identify a new constraint, because there is
identify a new constraint, because there is
always one in every system. The five
always one in every system. The five
-
-
step
step
process is then repeated for the next
process is then repeated for the next
constraint.
constraint.
The Process of Change
The Process of Change
Simply stated, the thinking process involves the

Simply stated, the thinking process involves the
rigorous application of effect
rigorous application of effect
-
-
cause
cause
-
-
effect logic
effect logic
to answer the following three questions
to answer the following three questions
:
:
What to Change?
What to Change?
What to Change to?
What to Change to?
How to Cause the Change?
How to Cause the Change?
What to Change?
What to Change?
Pinpoint the core problems.

Pinpoint the core problems.
The first question is equivalent to asking, Where is the
The first question is equivalent to asking, Where is the
constraint? Since this process is generally used
constraint? Since this process is generally used
when the constraint is not a physical resource, there
when the constraint is not a physical resource, there
is usually not physical evidence (such as work in
is usually not physical evidence (such as work in
process inventory) to point you to the constraint.
process inventory) to point you to the constraint.
Instead, you have to map what is currently going on in
Instead, you have to map what is currently going on in
your system.
your system.
This leads to the Current Reality Tree.
This leads to the Current Reality Tree.
the Current Reality Tree
the Current Reality Tree
Instead of using physical evidence, you have to start with the Instead of using physical evidence, you have to start with the
evidence that is available; the negative events that are apparen evidence that is available; the negative events that are apparent in t in
the system. the system.
Examples include: Examples include:
Frequently shipping orders late Frequently shipping orders late
excessive amounts of inventory excessive amounts of inventory
lead times that are increasing lead times that are increasing
poor human relations within the organization. poor human relations within the organization.
Goldratt calls these Undesirable Effects, or Goldratt calls these Undesirable Effects, or UDEs UDEs. The challenge is . The challenge is
to map out the interrelated web of cause to map out the interrelated web of cause- -and and- -effect that links the effect that links the
undesirable effects together. Once completed, one is is general undesirable effects together. Once completed, one is is generally ly
able to identify a core problem at the bottom of the map. able to identify a core problem at the bottom of the map.
What to Change to?
What to Change to?
The first step in determining the answer to this

The first step in determining the answer to this
question is to understand why the core problem
question is to understand why the core problem
exists.
exists.
It is assumed that managers are not dumb. If there is
It is assumed that managers are not dumb. If there is
an easy solution to this core problem it would have
an easy solution to this core problem it would have
been solved a long time ago. There must be some
been solved a long time ago. There must be some
conflict that underlies the core problem. Once this is
conflict that underlies the core problem. Once this is
identified, the thinking process is used to develop a
identified, the thinking process is used to develop a
breakthrough idea that will resolve a conflict. This is
breakthrough idea that will resolve a conflict. This is
done by using a tool known as evaporating clouds.
done by using a tool known as evaporating clouds.
What to change to?
What to change to?
(more)
(more)
In order to do this you must use simple

In order to do this you must use simple
and practical solutions.
and practical solutions.
How to cause the change?
How to cause the change?
In order to cause the change you must

In order to cause the change you must
induce the appropriate people to invent
induce the appropriate people to invent
such solutions. Using methods like the
such solutions. Using methods like the
Socratic method can have this effect.
Socratic method can have this effect.
Conclusion
Conclusion
The Theory of Constraints is about two

The Theory of Constraints is about two
things:
things:
Focus
Focus
Follow through
Follow through
.. ..
and of course, making money!

and of course, making money!
Resources
Resources
Levinson, William A., P.E., MBA.

Levinson, William A., P.E., MBA.
Goldratt's
Goldratt's
Theory of
Theory of
Constraints: Online Simulation
Constraints: Online Simulation
, at
, at
http://www.ganesha.org/leading/toc.html
http://www.ganesha.org/leading/toc.html
Leach, Larry.
Leach, Larry.
http://www.
http://www.
srv
srv
.net/~
.net/~
lleach
lleach
/TOC/defined.
/TOC/defined.
htm
htm
References
References
Goldratt, Eli,
Goldratt, Eli,
Its Not Luck.
Its Not Luck.
The North
The North
River Press, Great
River Press, Great
Barrington, MA, 1994
Barrington, MA, 1994
Goldratt, Eli,
Goldratt, Eli,
What Is This Thing Called The Theory Of
What Is This Thing Called The Theory Of
Constraints?
Constraints?
, The North River Press, Great
, The North River Press, Great
Barrrington
Barrrington
,
,
MA, 1990
MA, 1990
Dettmer
Dettmer
, William,
, William,
Eli M.
Eli M.
Goldratts
Goldratts
The Theory of
The Theory of
Constraints, A Systems Approach to Continuous
Constraints, A Systems Approach to Continuous
Improvement
Improvement
,
,
1996, ASQC press
1996, ASQC press
.
.

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Theory of Constraints

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Theory of Constraints

The Theory of constraints was developed and

One definition used by Eli Goldratt for TOC (edited) is:

A Thinking Process that enables people to invent

A process or process step that limits throughput.

Anything that limits a system from achieving

A constraint is a factor that limits the system

Focuses improvement efforts where they

Provides a reliable process that insists on

Before a company can properly focus,

Some would say that the goal of a

TOC Recognizes that only the owner can

Once the goal is identified, a necessary

The rate at which the system generates money through

All the money received from customers minus raw

The rate at which the system makes money(sales minus

All the money the system has invested in

Inventory is a liability, not an asset.

Raw materials and finished goods are inventory.

Machines and fixtures (if owned) are inventory.

Scrap material that is to be sold is inventory until sold.

All the money the system spends in order to

All employee time is operating expense.

Depreciation of a machine is a operating expense.

Scrap material thrown away.

All expenses not deducted in arriving at throughput.

Identify a system's constraints

Decide to exploit the systems constraints

Subordinate everything else to the above decision

Evaluate / Elevate the systems constraints

If in the previous steps a constraint has been broken, go

Warning: Do not allow inertia to cause a system

In order to manage a constraint you must first

Once the constraint is Identified, the next step is

Exploiting the constraint does not insure that the

After the constraint is identified, the available

Step 5 is to go back and repeat step 1 and

Simply stated, the thinking process involves the

Pinpoint the core problems.

The first step in determining the answer to this

In order to do this you must use simple

In order to cause the change you must

The Theory of Constraints is about two

and of course, making money!

Levinson, William A., P.E., MBA.

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