CHAPTER 8.

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THEORY OF CONSTRAINTS (TOC)
8.1 Abstract
Theory of Constraints (TOC) is an example of a management philosophy
built upon a limited number of assumptions and designed to provide a process of
continuous ongoing improvement [75]. The assumption forming one foundation
of TOC is that a system’s outputs are determined by its constraints [89]. The
assumptions forming another foundation are new definitions for throughput,
inventory and operating expense [20]. These definitions are designed to support
the goal of the organization, which is to make money [37], TOC, previously
referred to as Optimized Production Technology (OPT), is a production control
methodology that maximizes profits in a plant with a demonstrated bottleneck
[87], The process used by TOC to determine product mix that will maximize
profitability is a very simple series of steps [6]. In this chapter, a case study from
an industry is considered and it has been demonstrated how the application of
concepts of Theory of Constraints will maximize profit for an organization. A
case application has also been considered and the TOC concepts are applied to
find optimum production schedule to result in profit maximization. This chapter
further explains how TOC plays a vital role in increasing the performance through
a limited number of assumptions designed to provide a continuous process of
improvement as emphasized in Total Quality Management (TQM). This chapter
again shows the steps involved in solving a TOC problem along with optimization
of resources for increased demand conditions. This work has been carried out on
an IBM/PC compatible system.
8.2 Introduction
Since the initial work done by Goldratt in the mid-1980s and as the
concepts related to the Theory of Constraints have become more developed, many

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have concluded that the TOC approach offers nothing for profit maximization
[30]. TOC is a manufacturing philosophy, just as Just-In-Time (JIT) or Total
Quality Control (TQC). The TOC philosophy focuses on the role the constraints
play in systems and capitalizing on their role and improves the system’s
performance towards its goal [79]. A constraint is defined as anything that limits a
system from achieving higher performance versus its goal [35]. TOC concentrates
on the manufacturing system’s constraints and the implications of exploiting these
constraints [24]. The TOC has recently gained much success in its application to
industrial and service organizations. The traditional Materials Requirements
Planning (MRP) is nowadays being replaced by TOC because it is more active. Its
goal is to maximize output, which it achieves by identifying and exploiting the
bottleneck resources [31].
8.3 Development of TOC Concepts
The brief history of development of TOC concepts has already been
discussed in Chapter 4 (refer to 4.2). The TOC is popularized in several books -
The Goal (Goldratt and Cox, 1992), The Race (Goldratt and Fox, 1986),
Synchronous Manufacturing (Umble and Srikanth, 1990) - and in numerous
articles. Several of these (e.g., Fawcett and Pearson, 1991) provide thorough
reviews of TOC. The TOC concepts are based on conventional Materials
Requirement Planning (MRP) systems, which are developed as part of TOC’s five
focusing steps that are illustrated below.
8.4 Aspects of TOC - Steps involved in solving a TOC problem
The TOC is a top-down methodology that helps the manager concentrate
on those critical issues that contain the corporation throughput. The TOC
management cycle is symbolized in Fig. 8.1
♦ Identification of system constraint: This step is to prioritize the constraints
according to their impact on the goal.

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♦ Determination of how to exploit the system’s constraints: Once it is
believed that there are only a few constraints that are limiting performance,
then all other resources are not constraints.
♦ Subordination of everything else to the above decision: This step is
included to ensure that the other resources are subordinated to the constraints.
There is no point to spend extra time managing resources that are not
constraints to improve performance.

Fig. 8.1 Theory of Constraints Management Cycle

♦ Elevation of system’s constraints: This step is essential so that action is
taken to reduce their impact and improve performance.

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♦ Breaking of constraints: This step is essential to make sure that we move
forward and find the next constraint.
8.5 Comparison with Total Quality Management (TQM)
There is a strong relationship with the continuous improvement processes
that are espoused in TQM. Both processes suggest that the way to proceed with
improvement is not through major changes but through small, incremental
changes to a limited set of problems. Once a problem is solved, another will be
found that needs to be solved. This continuous process of improvement should
continue. The cumulative effect of small improvements is major improvement,
which will result in increased customer satisfaction, reduced costs and improved
profits [63].
8.6 Concepts of TOC
The basic concepts of synchronous manufacturing system have already
been explained in Chapter 4 (refer to 4.3). Goldratt began to devote his efforts to
the development of a general theory for running an organization rather than on
improvements in the scheduling methodology. In synchronous manufacturing,
the bottlenecks are identified and used to determine the rate of flow. To maximize
flow through the system, bottlenecks must be managed effectively [83]. Called
capacity constrained resources, these bottlenecks led to the idea of managing
constraints. Every organization has constraints preventing it from achieving a
higher level of performance. These constraints should be identified and controlled
to improve performance. When a constraint is broken, one has to identify the next
constraint and improve, thus continuing the process of improvement [87]. TOC
consists of the following components.

If A logistics branch with the five-focusing step procedure; the scheduling

methodologies of drum-buffer-rope and buffer management.

|p Performance measurement system

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|p Problem solving/thinking process containing effect-cause-effect diagram and
its components.
The first component and its associated functions have already been discussed
in Chapter 6, which deals with DBR approach used for scheduling purposes. The
second component is discussed in Chapter 4 (refer to 4.6). These performance
measures are defined to focus decision making on activities that will improve the
goal of making a profit. The third component is the least researched and least
visible to operations managers. Hence it is not discussed in this chapter.
Because these measures have the greatest impact on net profit and return on
investment, throughput is elevated to the most important measure. Once the
throughput is focussed, it is possible to determine the constraints that are
preventing the throughput from increasing and thus increasing profit.
The Goldratt’s rules of TOC have been represented as objectives of
synchronous manufacturing and explained in Chapter 4 (refer to 4.7) and the most
common terms associated with TOC have also been discussed in Chapter 4 (refer
to 4.9)
8.7 Problem Formulation - Case Study
The problem was formulated by considering a case study in a medium-scale
industry. This involves achieving objectives such as
ft To obtain higher throughput
ft To maximize profit
ft To find optimum production schedule
ft To increase demand conditions
Given below is an industrial system in which analysis is carried out to apply
the concepts of TOC
8.8 Industrial System
The firm, where studies are carried out, is a medium-scale industry
manufacturing parts being supplied to various complementary industries. In the

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shop floor, there are two products T and S produced, the details of which are
given in Table 8.1
Table 8.1 Price details of products manufactured
Selling Price/unit Cost Price/unit Market
Products in Rupees in Rupees Demands
Per week
T 4500.00 2025.00 100
S 4950.00 1125.00 110

Fig. 8.2 shows the manufacturing environment.

8.9 Conditions prevailing in the industrial system

1. Demand is continuous - products manufactured in the shop floor are

completely sold in the market
2. One unit of raw material 1 is used to produce one unit of T and one unit of
raw material 1 and one unit of raw material 2 are required to produce one unit
of S

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3. Through process improvement and set up time reduction, reduction in process
time is significantly achieved.
Table 8.2 shows the resources along with processing times for products T and S
Table 8.2 Resources with processing time

Raw Resources Processing Time End

materials in minutes Products
1 P&P 14+ 9 = 23 T
1 P&Q 14+9 = 23 S
2 R&Q 7 + 9 = 16 S

Product T is produced from raw material 1, which costs Rs. 2025.00 per
unit and first requires 14 minutes of processing on resource P and another 9
minutes of processing on resource P. Product S requires raw material 1 processed
through resource P at 14 minutes and raw material 2 (cost price Rs. 1125.00)
through resource R with a time required of 7 minutes per unit. The two products
are then moved to final assembly, which requires 9 minutes on resource Q.
Available time per week for each resource is = 60 minutes x 8 hours x 5 days
= 2400 minutes /week.
Step 1: To calculate net profit per unit.
Product T has a net profit of (Rs.4500.00 - Rs.2025.00) = Rs. 2475.00
Product S has a net profit of (Rs.4950.00 - Rs. 2025.00 - Rs. 1125.00)
= Rs. 1800.00
From this conventional calculation, it is quite obvious that product T has the
greatest profit margin. Hence it is desirable to maximize production of T and use
the remaining time for S.
Fig. 8.3 shows the flow chart for the calculation of net profit for the products T
and S.

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Flow chart for the calculation of Net Profit

START
=±=
Input MD, CPT,
LEGEND
SPT, CPS, AVT,
SPS MD - Market Demand
CPT - Cost Price of T
3l SPT-Selling Price ofT
Input OT, OS, CPS - Cost Price ofS
A1P, A1Q, AIR SPS - Selling Price of S
OT - Output T
OS - Output S
A1P - Time allotted for
PPT = SPT- CPT resource P
PPS = SPS- CPS A1Q - Time allotted for
resource Q
AIR - Time allotted for
'resource R
TotT = OT * (A1P + A1P)
AVT - Available Time
TotS = AVT -TotT PPT-Per Profit for
OS = TotS/AlP Product T
PPS - Per Profit for Product S
TotT - Total Time
allotted for T
ProT = PPT * OT TotS - Total Time
ProS = PPS * OS allotted for S
NP = ProT + ProS ProT - Profit for Product T
Pros - Profit for Product S
NP-Net Profit
Output UPS-Use of P by S
UQS - Use of Q by S
‘NetProfif URS-Use of R by S
NP

C stop )
Fig. 8.3 Flow Chart showing the procedure for calculating Net Profit for the
products T & S
Note: In this case study, workcentre (bottleneck resource) has been considered as a
constraint towards optimal performance
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Step 2: To calculate time requirement for each product and total net profit
If one hundred units of T are produced, then 2300 minutes of resource P are used
and a net profit of Rs. 2,47,500.00 is realized from T.
Resource P has 100 minutes of time left that may be used to produce 7 units of S.
This results in a profit of Rs. 12,600.00 from S.
Hence total net profit = Rs. (2,47,500.00 + 12,600.00) = Rs. 2,60,100.00
Resource Q is used for 63 minutes and resource R is used for 49 minutes per
week. Hence it is quite obvious that marketing would be induced to sell T and
reduce the emphasis on S.
Step 3: Consideration for the utilization of bottleneck resource.
The problem with the analysis is that it does not consider the utilization of
bottleneck resource P, which is the constraint preventing, increased profit. It is
important to note that T uses 23 minutes per unit of P while S uses 14 minutes
only. According Goldratt’s rule, "An hour lost on the bottleneck is an hour lost
for the entire system”. The throughput of the entire system is dependent on the
bottleneck and suggests that the botteleneck should be investigated as the point to
improve profits.
Step 4: Utilization of bottleneck resource.
Because S uses less of bottleneck resource P, perhaps S should be
scheduled first, leaving the remaining time for T. Production of 110 units of S
would use 1540 minutes of P, 990 minutes of Q and 770 minutes of R and would
result in a net profit of Rs. 1,98,000.00
That leaves 860 minutes on P for product T and 37 units of T could be produced.
This results in a net profit of Rs. 91,575.00 and a total net profit of
Rs. 2,89,575.00 an increase of Rs. 29,475.00.
8.10 TOC for Performance Improvement
At this point, it is appropriate to apply the steps of TOC to improve the
performance of the manufacturing environment.

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Step 1: Identification of system constraint
It is evident that the resource P is a constraint because it is a bottleneck
constraining throughput. Again market is another constraint because 110 units per
week of S are fully produced and sold. An increase in demand for S would also
increase profit.

Increase of capacity of resource P

It is desirable to continue with step 1 to identify the most important
constraint. If it is possible to increase the demand for S, then another limit at a
demand of 171 which would totally consume resource P would be reached. In that
case, a net profit of Rs. 3,07,800.00 would be achieved. If resource P constraint is
focused, then it becomes possible to increase profit and allow the production and
sale of both T and S. Now resource P is focussed as the first constraint to exploit.

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Step 2: Determination of how to exploit the system’s constraints
Considering assumption number 3, processing time is significantly
reduced on resource P as shown in Fig. 8.4
The following Table 8.3 shows raw materials and processing times after
improvement
Table 8.3 Resources with processing times after improvement
Raw Processing Time End
Resources
materials in minutes Products
1 P&P 9 + 4.5 = 13.5 T
1 P&Q 9 + 4.5= 13.5 S
2 R&Q 7 + 4.5 =11.5 S

It is possible to produce all 100 units of T and 110 units of S each week
and can use 2340 minutes for production of the 2400 available. This results in a
profit of Rs. 2,47,500.00 from T and Rs.l, 98,000.00 from S for a total of
Rs.4,45,500.00.
Steps 3 & 4 have been completed. Resource P is now using only 2340 minutes of
the 2400 available, so that constraint has been broken and the next constraint can
be identified. The demand constraint is the one that is preventing increased profit.
Hence demand for T or S should be increased. Figure 4 shows the flow chart
considering the bottleneck resource P.
The flow chart given in Fig. 8.5 shows the bottleneck resource P
considered for better performance of the system.
8.11 Increase of Demand
If the demand for T or S is increased by 1, will the profit increase? If the
net profit alone is given importance, T with a profit of Rs.2, 475.00 is still more
appealing than S with a profit of Rs.l, 800.00. If T were increased to 101, then
the resource P would be used 2353.5 minutes per week, still within the 2400
minutes available.

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Considering Bottleneck Resource:

i
ProS = PPS ♦ OS

TotT = AVT - UPS

-I

OT = TotT/AlP

Contd...

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 Fig. 8.5 Flow chart for the consideration of bottleneck resource P
If the sales of T could be increased to the maximum allowed by the resource P
available time, it is possible to produce 104 units per week of T and a profit
increase of Rs.9, 900.00 is achieved
The impact of resource P has not yet been considered. It is ideal to find out
the result if the demand of S is increased to a limit allowed by the resource P. It
would be possible to produce 116 units of S and a profit increase of Rs. 10,800.00
will be achieved. If the tradeoff is between an increase of 6 units of S or 4 units of
T, then S is preferred because it increases net profit the most due to its lower
utilization of resource P.
In addition, if sales could be increased beyond those figures above, then
profit would also increase. The demand for S can even be increased to 130 units
per week. If hundred units of T were also sold, the time required on resource P
would be 2520 which is greater than the available time. If 130 units of S are
produced and sold, that would require 1170 minutes on resource P leaving 1230
minutes for T. Since T requires 13.5 minutes on P, 91 units of T could be
produced and sold.

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The net profit for S would be Rs. 1800.00 x 130 = Rs. 2,34,000.00
The net profit for T would be Rs.2475.00 x91 = Rs. 2,25,225.00
Total Profit would be = Rs. 4,59,225.00
20 units can even increase the demand for T. The 120 units per week of T would
require 1620 minutes on resource P leaving 780 minutes for S. Then 86 units of S
could be produced and sold for a net profit of Rs.l, 54,800.00
The 120 units of T would have a net profit of Rs. 2,97,000.00
The Total profit = Rs.4, 51,800.00
This is lower than increasing S by 20 units per week.
When the sales of S is increased to 130 units per week, resource P is again a
constraint. The steps given above continue to break the capacity constraint or
increase sales.
8.12 Result
The TOC technique can also be used to determine the optimal product mix
under a given set of circumstances. Through TOC, it is possible to determine the
impact of other changes in processing time or products produced, or machines
used. TOC includes a well-developed procedure namely drum-buffer-rope, which
can be used even in JIT environment. TOC analysis focuses on the component
that limits the organization’s ability to make money, the system’s constraint. This
focus shows where improvements will have the greatest impact. TOC specifies
the ways of increasing the throughput and reducing the inventory level. Once the
system constraint is broken a new system constraint is identified, with new
schedules derived, based upon the new system constraint and the whole process of
improvement repeats itself. Hence TOC system is a tool for problem solving. It is
through the five step focusing process that continuous improvement is obtained.
8.13 Conclusion
The above case study illustrates the importance of identifying the
constraints and determining which improvement will result in the greatest gains.

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The net profit margin per unit turned out to be the wrong indicator of which item
to increase sales or to take the first piece of the resource constraint. Goldratt’s
ideas regarding production scheduling and the use of capacity have made many
production and inventory professionals think differently about how to utilize
resources properly. TOC presents a framework for identifying constraints and
improving profit performance. An important lesson with capacity is that the most
important capacity constraint, a bottleneck requires the most effort to schedule
and manage because the time lost on that resource is the time lost for the entire
process. The simple TOC procedure outlined by Fox is, in fact, inefficient in
making new product introduction decisions. At best, the Fox solution acts as a
good starting point towards the optimal solution. Future research on TOC can be
placed into a more reasonable classification scheme, especially the testing of DBR
and other buffer management methodologies. However, the other aspects of TOC,
such as the performance measurement systems and problem solving techniques
should also be explored for the potential impact to the operation of an
organization. In this chapter, the concept of theory of constraints is introduced and
an analysis is made with the help of a case application. A brief history of
development of TOC concepts is discussed. This chapter further enlightens the
steps involved in solving a TOC problem and compares with other manufacturing
management methodologies like TQM and OPT. Few literatures on TOC along
with the details of performance measures used to study the manufacturing system
are also highlighted. The rules developed by Eliyahu Goldratt, which form the
basis for solving any TOC and other Linear Programming problems, are
indicated. The main objectives of this case study are shown and an illustration is
also given for better understanding of the manufacturing scenario of the industry.
It is also explained through TOC philosophy how utilization of bottleneck
resources leads to increased sales, demand, market conditions and profitability.

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