THEORY OF

CONSTRAINTS
Overview & Definitions
 LET ME BEGIN…..BY ASKING
What is the goal of an organisation?
How do you measure the performance?
How do we know that the future is secure?
 3

MANAGING ORGANIZATION
• Is it a science or it borders on the side of art ?
• What is science??
• Premise of having a precise answer for every situation
• Collection of well established procedures…
• Notion of finding the secrets of nature…
• Science for most is a blend of all of the above
Production

Finance

Purchase

Marketing

Stores
The Company

Maintenance

HR
HOW ARE WE MANAGING?
 WHAT IS THE MAJOR CAUSE FOR THEIR EXISTENCE?

• Poor Due Date performance

• Long lead times
• Too high inventories
• Long Pay back periods
• Too many customer complaints
• Bad Human relationships
 HOW SHOULD WE START
Aspect Undesirable Effect

Production/Logistics Inventories too high

Service Too many customer complaints

Finance Too long pay back periods

People Bad internal relationships

 WHAT ARE YOU DOING ABOUT THEM…
Aspect Un Desirable Effects Initiatives

Production/ High inventories JIT/SCM/TQM

Logistics

Service Too many customer Customer Relationship

complaints Management

Finance Long payback periods ABC, EVA

People Poor human relationships HR Management

 COMPROMISE IS NOT A SOLUTION
The path of least resistance is the oscillation
that we experience when we constantly
compromise between the conflicted entities of
two local wants, a little in one direction , then
a little in other direction, back and forwards
 1ST APPROACH
• The cause is variability
• Variability in
• Processes
• Vendor performance
• Quality
• Human Skills
• Etc
• Implications: comprehensive efforts to reduce variability everywhere,
significant results cannot be expected in short terms
 2ND APPROACH
• The Mode of Managing Operations
• Courage and consensus to change the mode of operations
• A real jump in performance in a short period of time
• Provides focus on where to reduce variability
 11

THE CHAIN ANALOGY…

• 1st Approach: The cost world
• Weight is analogous to cost
• Wt of chain equal to Sum of wt of each link
• Management implications
• Global improvements is Sum total of all small improvements
• Treating every function as independent

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THE CHAIN ANALOGY…

• 2nd Approach: The throughput world
• Strength of link analogous to performance
• Strength of chain is equal to the strength of the weakest link
• Management Implication
• Global improvements NOT the sum of all local improvements
• All functions a set of dependent events

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 HOLISTIC APPROACH
• Why ?
• Changing part of a system may have significant implication ( positive as well
as negative) on the other parts
• There are endless places where improvements are possible but these
activities require the use of limited resources ( time, money, manpower…)
• Will all improvements improve the performance of organization ?
THEORY OF CONSTRAINTS : HOLISTIC APPROACH

“Within any complexity there is

an inherent simplicity that
governs the throughput of any
organization”
 FIVE LEVELS OF MAKING MONEY
Level 1: Unable to meet financial commitments

Level 2: Meeting Financial commitments but not making profits

Level 3: Making Profits Consistently but profits fluctuating

Level 4: Profits increasing year after year

Level 5: Profits & Return on investments increasing year after year

* RG
 PRINCIPLES OF FLOW
• When work is properly scheduled to get the maximum, uninterrupted
performance at the most constrained resources, and when material
release is controlled and properly buffered to sustain that
performance without building unneeded queues of work at the less
constrained resources, a factory will achieve optimal overall
performance. Throughput will be maximized; work in-process and
finished goods inventory will be minimized; and the level of operating
expense needed to support these positions will be lowest. Work will
flow reliably, in relatively small quantities, and at relatively high
velocity. Most resources, both equipment and people, i.e. those that
do not control the flow, will experience regular periods of productive
inactivity
 THE WAY AHEAD
• What to Change ?
• What to change TO?
• How to cause the change?
 FOUR PILLARS OF TOC

• Inherent • People are • Win- win • Never Say “I

2
1

4
simplicity good • Every conflict know”
• Every situation, • The can be • Every situation
no matter how measurements removed. can be
complex it and policies • Compromise is substantially
initially looks, is drive not a solution improved,
exceedingly behaviors even sky is not
simple the limit
 PARTS OF A THEORY

• Mindsets
• Measures
• Methodology
 MEASURMENTS : GLOBAL
The measurements that tell us the company is doing well are

• ROI ( return on investments)

• Net Profit
• Free Cash Flow
 MEASUREMENTS : LOCAL
• Can you base your operational decisions on these measurements
• Can you decide which product to make and sell based on them
• Can every employee understand how Her/His action impact them

• We don’t say that these measures are wrong but question their effective use as
operational measures
 CASH
ROI NET PROFIT
FLOW

Cost Intuition

Local measurements
 THE NEW MEASUREMENTS
• Throughput : T
• “The rate at which the system generates money through sales”

• Investment or Inventory: I
• “ All the money the system invests in purchasing things the system intends to sell”

• Operating Expenses: OE
• “Operating expense in defined as all the money the system spends in turning
inventory into throughput”
 TOC MEASUREMENTS : GLOBAL
The measurements that tell us the company is doing well are

• ROI : T – OE/ I
• Net Profit : T - OE
• Free Cash Flow : T – OE – Δ I
 OPERATIONAL MEASUREMENTS

• Productivity : “Throughput / Operating expense” T/ OE

• Turns : “Throughput / Inventory” T/I

• On Time in Full OTIF

 TOC MEASUREMENTS

CASH
ROI NET PROFIT
FLOW

T, OE & I

T/OE, T, ΔT/Δ OE etc…Local

Measurements
 WHAT IS A CONSTRAINT ?
• Any thing that limits you from making more of your Goal. ( Money)

• Constraint need not always be physical , it can be policy too

 TYPES OF CONTRAINTS
• Market
• Operations
• Supplier
• Policy
• Cash
 IDENTIFYING CONSTRAINTS
• Market
• Have > 50% of world market share
• Orders
• Consistently deliver > 95% On-Time In-Full (OTIF)
• Suppliers
• Pay consistently on time (>95%)
• Consume > 50% of world consumption, and
• Operational policies
• Raw material consistently available on time (>95%)
• OTIF<95%
• Overall equipment effectiveness (OEE) for no equipment >90% on 24X365 basis

*RG
 IDENTIFYING CONSTRAINTS
• Operations-Capacity
• Raw material is available consistently on time (>95%)
• Overall Equipment effectiveness (OEE) for at least one equipment > 90% on
24X365 basis

• Cash
• Unable to pay suppliers on time
• Suppliers will supply only on upfront payment
• Do not get material consistently on time (<95%)

*RG
 TOC SOLUTIONS
• Drum Buffer Rope (DBR) : Production & Operation Constraints
• Rapid Replenishment : Distribution & Supplier
• Critical Chain : Project Management
• Thinking Process : Root Cause or Policy Constraint
• Mafia Offer : Market Constraint

• Time & Cash : Cash Constraint

 32

FOCUSING…
• Identify the constraints
• Decide how to exploit the constraint
• Subordinate everything to that decision
• Elevate the system constraints
• If, in the previous steps the constraints have been broken go back to step 1.

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 33

PARETO PRINCIPLE…
• Is the 20/80 rule still valid ?
• In the throughput world it is…

0.1/99.9
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 COMPETITIVE POSITION
• A decisive competitive edge is gained only when a company satisfies a
significant market need to an extent that none of its significant competitors
can
• Value ≠ competitive position
• Is the customer ready to pay for the value that you deliver….
• If you speak just like your competitors , your buyer will base his decision on
price
• Develop a value model which leads to a Mafia Offer…